Please only reply if you are 100% sure and can explain the answer to each thorou
ID: 1154294 • Letter: P
Question
Please only reply if you are 100% sure and can explain the answer to each thoroughly.
I have been going back and forth on these for days. The sticky wages on 3 and 4 are messing me up.
I get the fact that it takes much longer for a recessionary gap to close due to sticky wages, but it still can close, right? The question is just worded so strangely it is messing with my head.
Is question 1 inflation only, or is it a trick, meaning the supply may shift too far to the left and lead to stagflation?
1) Which is more likely to happen as a result of a sudden increase in aggregate demand?
a) Recession only.
b) Inflation only.
c) Stagflation.
2) Which is more likely to happen as a result of a sudden increase in aggregate supply?
a) Recession only.
b) Inflation only.
c) Stagflation.
d) None.
3) Which of the following is true?
a) A recessionary gap cannot be closed completely because of sticky wages.
b) Empirical studies show that a recessionary gap can be closed automatically and quickly.
c) Wages decrease dramatically in the time of recession for reasons such as minimum wages, union contacts, and government restrictions.
d) Firms do not tend to reduce wages by much during a recession because they are afraid of losing their best workers.
e) Both a and d.
4) Which of the following is true?
a) A recessionary gap can be closed completely because of sticky wages.
b) Theoretically, an inflationary gap can eventually lead to stagflation.
c) Wages increase in the time of recession for reasons such as minimum wages, union contacts, and government restrictions.
d) a and b.
Explanation / Answer
Answer 1:
Option B. A nsudden increase in aggregate demand in the economy will lead to inflation only.It will not lead to recession or stagflation which happens due to leftwards sgift of the aggregate supply curve.
Answer 2:
Option D. Increase in aggregate supply in the economy will not lead to inflation, recession of stagflation.
Answer 3:
Option D. Firms do not tend to reduce wages by much during a recession because they are afraid of losing their best workers.
Answer 4:
Option A. A recessionary gap in the economy can be closed completely because of sticky wage theory which prevents wages from falling during recession.