Home » 4.Which of the following products is most likely to have a quot;stickyquot; price?

4.Which of the following products is most likely to have a quot;stickyquot; price?

4.Which of the following products is most likely to have a​ “sticky” price?


wages of a Hollywood star


an ounce of gold


one gallon of gasoline


heavy machinery

5.Which of the following is not a component of aggregate​ demand?





Business taxes



Federal government expenditures



Net exports

6.Because of other economic​ factors, such as​ taxes, the multiplier in the United States is

larger than

smaller than

equal to


7.The components of aggregate demand and gross domestic product are the​ same: consumption,​ investment, government spending and net​ exports: True or False

8.Higher Gas​ Prices, Frugal​ Consumers, and Economic Fluctuations. Suppose gasoline prices increased sharply and consumers became fearful of owning too many expensive cars. As a​ consequence, they cut back on their purchases of new cars and decided to increase their savings.

Assuming a​ short-run aggregate supply​ curve, this behavior shifts the aggregate demand curve to the


​right, leading to a large decrease in output and a small decrease in price.


​left, leading to a large decrease in output and a small decrease in price.


​left, leading to a large increase in output and a small increase in price.


​right, leading to a large increase in output and a small increase in price.


APPLYING THE​ CONCEPTS: Are oil prices increases caused by true shocks to​ supply?

Economists have long believed that disruptions to oil supplies were the cause of supply shocks for the U.S economy. If this were the​ case, supply disruptions would be true external​ “shocks” to the economy. But not all changes in oil prices are necessarily caused by supply disruptions. Oil price increases may be caused by increases in world demand or due to the activities of speculators in the oil market.

How important are actual supply disruptions to oil market for the U.S.​ economy? Economist Lutz Kilian carefully examined this issue by constructing measures of supply disruptions in oil producing​ countries, based on a detailed examination of prior trends in demand and specifications in oil contracts. While Kilian did find evidence of some supply​ disruptions, these only explained a small fraction of the variability of oil prices. In his​ view, other factors dominated the price movements for​ oil, even during the time periods that are conventionally associated with supply disruptions.

Speculation in oil markets may be one such factor. Speculators can be​ countries, firms, or individuals. If speculators believe prices are going to rise in the​ future, they will buy oil now​ or, if they own​ it, sell less into the market. Either action increases the current price of oil. Note that if speculators are on average correct in their​ assessments, they will smooth out the price of oil over

timelong dash


it now and lowering it later. This can actually benefit the economy. While politicians often complain about​ speculators, in many cases they may be helping the economy. Of​ course, speculators can be wrong and make fluctuations in prices​ worse, but in this case at least some of them will lose money.

​Source: In part based on Lutz​ Killian, “Exogenous Oil Supply​ Shocks: How Big Are They and How Much Do They Matter for the U.S.​ Economy?” Review of Economics and


May​ 2008, Vol.​ 90, No.​ 2, pp.​ 216-240.

Related to​ Application: Oil Supply Disruptions, Speculation and Supply Shocks


The Role of Expectations and Supply Shocks. Suppose an oil producing country believed that political instability was likely in the future in other parts of the world and prices would rise in the next year.

They can be expected to sell



​today, which would



the price. This will cause aggregate


supply and demand to increase since more oil revenue will be earned.


supply to decrease since oil is a cost of production.


demand to decrease since oil is a cost of production.


supply and demand to decrease since oil is used by everyone.

10.A negative supply shock temporarily






full employment and




After the


supply​ shock, real GDP is

higher than

lower than

potential GDP.

This implies that unemployment is ▼


rising ​,

driving wages




This results in a

rightward or downward

leftward or upward

shift of the​ short-run aggregate supply curve.

10.Lack of Credit and Aggregate Demand and Supply. In the 2008​ recession, both firms and households had limited access to credit.

This could be both a negative shock to aggregate demand and a negative shock to aggregate supply because when consumers spend​ less,


the aggregate demand​ decreases; and the government will spend less decreasing the aggregate supply.


the aggregate demand​ decreases; and the aggregate supply will fall as borrowing costs increase.


the aggregate supply​ decreases; and the government will spend less decreasing the aggregate supply.


the aggregate supply​ decreases; and the aggregate demand will fall as borrowing costs increase.

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