Suppose That Prices Are Sticky in the Short-Run

question 25

Multiple Choice

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

---

Definitions:

Constant-Cost Industry

An industry where the input prices remain stable as the industry's output changes, leading to a linear supply curve because costs do not vary with the level of production.

Short Run

A period of time during which at least one input of production is fixed, limiting the ability of a firm to adjust its output levels fully.

Product Price

The amount of money required to purchase a specific product or service at a given time.