Question

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Suppose a firm is currently producing 900 computers per week and charging a price of

$1,200 per computer.

a. Show how the firm will respond to a negative demand shock if prices are flexible

b. Generalizing from the computer market specifically to the economy as a whole, what will

happen when this negative demand shock occurs across the economy's many markets?

Real GDP will decrease, prices will increase, and unemployment will increase.

Real GDP will stay the same, prices will decrease, and unemployment will increase.

Real GDP will stay the same, prices will decrease, and unemployment will stay the same.

Real GDP will increase, prices will increase, and unemployment will decrease.

Suppose a firm is currently producing 900 computers per week and charging a price of

$1,200 per computer.

a. Show what happens to the firm's inventory of computers if there is a negative demand

shock when prices are fixed.

b. Generalizing from the computer market specifically to the economy as a whole, what will

happen when this negative demand shock occurs?

Real GDP will stay the same, prices will decrease, and unemployment will stay the same.

Real GDP will stay the same, prices will decrease, and unemployment will increase.

Real GDP will increase, prices will increase, and unemployment will decrease.

Real GDP will decrease, prices will stay the same, and unemployment will increase.

The graph below depicts the computer market with first a fixed price and then a flexible price,

where DL corresponds to a low level of demand for computers while DM and DH corresponds

to a medium level and a high level of demand for computers respectively. Suppose a firm is

currently producing 900 computers per week and charging a price of $1,200 per computer.

a. What happens to the firm's inventory of computers if there is a negative demand shock from a

medium level of demand to a low level of demand and prices are fixed?

The firm's inventories will not change.

The firm's inventories will decrease by 150 computers per week.

The firm's inventories will increase by 250 computers per week.

The firm's inventories will increase by 200 computers per week.

b. How will the firm respond to a negative demand shock, from a medium level of demand to a

low level of demand, if prices are flexible?

The firm will cut production to 700 computers per week and charge a price of $900.

The firm will cut production to 700 computers per week and charge a price of $1,200.

The firm will continue to produce 900 computers per week and charge a price of $1,200.

The firm will continue to produce 900 computers per week and charge a price of $900.

Answer 1

Q3 is incomplete Q1 and Q2 are answered below. In case of negative demand shock, the firm will respond by reducing price and supply of its computers in the economy. This happens because negative shock shifts the demand curve to the left, leading to a fall in both prices and quantity sold. Real GDP will stay the same, prices will decrease, and unemployment will increase. Reason: As demand curve shifts to left for the entire economy, it leads to a fall in price level and nominal GDP. This will mean lower employment (due to lower demand and lower production). Real GDP remains unchanged. Due to negative demand shock, firms will respond by reducing their production of their goods, since price will always remain unchanged. Real GDP will decrease, prices will stay the same, and unemployment will increase. Reason: As demand curve shifts to left for the entire economy and price line remaining unchanged and fixed, it leads to a fall in nominal GDP with no change in price level. This will mean lower employment (due to lower demand and lower production). Real GDP also will fall due to fall in nominal GDP