In a Market System, How Are the Price Signals Established

question 258

Multiple Choice

In a market system, how are the price signals established?

• A) Consumer advocacy groups establish fair prices for items, and most firms follow these pricing guidelines because they don't want to anger their consumers.
• B) Industry associations establish an acceptable price range for each commodity sold within the industry, and member firms are obligated to abide by association guidelines.
• C) The forces underlying supply and demand interact to determine a market clearing price.
• D) Federal legislation establishes maximum prices for most goods, and state governments regulate the prices of any remaining items.

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Definitions:

Actual Unemployment

The current level of unemployment in the economy, reflecting the number of people who are actively seeking employment but are without jobs.

Natural Rate

The level of economic activity, particularly unemployment or interest rates, that corresponds to the economy's long-term equilibrium without short-term cyclical fluctuations.

Potential Output

Potential output is the maximum amount of goods and services an economy can produce when it is most efficient and fully employed, without causing inflation.

Expansionary Gap

A situation where real GDP exceeds potential GDP, often leading to inflationary pressures due to high demand in an economy.