Suppose That Prices Are Sticky in the Short-Run

question 124

Multiple Choice

Suppose that prices are sticky in the short-run. Which of the following best describes the economy's response to a negative demand shock?

• A) Firms' inventories will increase, causing them to cut production. Ultimately, real GDP will decrease and unemployment will increase.
• B) Firms' inventories will decrease, causing them to increase production. Ultimately, real GDP will increase and unemployment will decrease.
• C) Firms' inventories will increase, causing them to cut production. Ultimately, real GDP will increase and unemployment will increase.
• D) Firms' inventories will increase, causing them to cut production. Ultimately, real GDP will decrease and unemployment will decrease.

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Definitions:

Short-Term Investments-AFS

Assets that are readily marketable and intended to be converted into cash within a short period, typically a year, classified as "Available for Sale."

Notes Payable

Short or long-term liabilities representing amounts the company owes on written promises to pay specified sums of money at future dates.

Equity Investments-AFS

Acronym for Available-for-Sale, equity investments are securities not classified as held-for-trading or held-to-maturity, and can be sold in response to liquidity needs.

Equity Method

An accounting technique used to record investments in other companies where the investor has significant influence but does not have full control.