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Chapter 6: Q6. (page 129)

True or False. Because price stickiness matters only in the short run, economists are comfortable using just one macroeconomic model for all situations.

Short Answer

Expert verified

The statement is false.

Step by step solution

01

Meaning of price stickiness

Prices are sticky only in the short run.As time rolls on, the firms have to change the prices for their products to maintain the equilibrium between demand and supply. If the firms keep up the high prices for longer, the demand will fall short of the supply, and the economy will face overproduction. On the contrary, the low prices will pull the demand upward, and there will be underproduction in the economy.

Therefore, to maintain the equilibrium in the long run, the prices must be flexible.

02

Reason for the false statement 

Since the prices are rigid in the short run and flexible in the long run, the firms鈥� demand and supply behave differently in the short run and long run. To analyze different demand and supply behaviors in the long and short run, firms need separate models.

Therefore, economists cannot use just one macroeconomic model for all situations.

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Most popular questions from this chapter

Refer to Figure 6.1b and assume that the price is fixed at $37,000 and that Buzzer Auto needs 5 workers for every 1 automobile produced. If demand is DM and Buzzer wants to perfectly match its output and sales, how many cars will Buzzer produce, and how many workers will it hire? If, instead, demand unexpectedly falls from DM to DL, how many fewer cars will Buzzer sell? How many fewer workers will it need if it decides to match production to these lower sales?

Are all prices in the economy equally inflexible? Which ones show large amounts of short-run flexibility? Which ones show a great deal of inflexibility over months or years?

Why do many firms strive to maintain stable prices?

Consider a nation in which the volume of goods and services is growing by 5 percent per year. What is the likely impact of this high rate of growth on the power and influence of its government relative to other countries experiencing slower rates of growth? How will this 5 percent growth rate likely affect the nation鈥檚 living standards? Will the standard of living grow by 5 percent per year, given population growth? Why or why not?

Has economic output always grown faster than the population? When did modern economic growth begin? Have all of the world鈥檚 nations experienced the same extent of modern economic growth?
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