Question

What do Keynesian economists think will happen when GDP is low, with regard to firms' expenses (AS)?

a	Because of lower demand, prices of all factors (input costs) are falling, and AS will shift to the right, compensating for any loss/left-shift in aggregate demand, returning the economy to equilibrium.
b	Because of lower demand, some incomes are falling yet some expenses are hard to ignore. Wages, contracts, rents are not easily scaled down with falling sales. These sticky wages keep prices high while GDP and employment are down, and the economy will not easily find equilibrium.
c	Firms' expenses (AS) have nothing to do with GDP.

Question 5 (1 point)

What do Neo-Classical economists think will happen in the slow economy, with regard to firms' expenses (AS)?

a	Firms' expenses (AS) have nothing to do with GDP.
b	Because of lower demand, some incomes are falling yet some expenses are hard to ignore. Wages, contracts, rents are not easily scaled down with falling sales. These sticky wages keep prices high while GDP and employment are down, and the economy will not easily find equilibrium.
c	Because of lower demand, prices of all factors (input costs) are falling, and AS will shift to the right, compensating for any loss/left-shift in aggregate demand, returning the economy to equilibrium.

Question 6 (1 point)

Sticky Wages mean that...

a	As AS shows, when consumers have less money, suppliers lower their prices.
b	Wages, contracts, rents are not easily scaled down with falling sales. (Would you settle for a reduction in pay? Would your car loan bank settle for a smaller monthly payment?)
c	As sales fall, there is less need for labor, machines, supplies (factors of production), and costs go down. Input prices go down and compensates for the reduced incomes people have.
d	Wages, contracts, rentes are controlled by employers and employees feel oppressed.

Answer 1

4. According Keynesian sticky wage price theory, during times of lower demand and lower income to the firms, the price and cost does not decrease in such a way as to increase aggregate supply. The workers and resources owners are working with their fixed wages on their earlier contracts. Thus the expenses of the firms cannot scale down while sales are falling. Thus the prices will remain as high while the GDP and employment are low. Thus the economy does not reach to its equilibrium automatically. Therefore the best way to increase aggregate supply is to increase aggregate. While aggregate demand increase, the price level increase without any corresponding increase in expenses of the firms. This will promote more aggregate supply, output and employment.

Answer: b. Because of lower demand, some incomes are falling yet some expenses are hard to ignore. Wages, contracts, rents are not easily scaled down with falling sales. These sticky wages keep prices high while GDP and employment are down, and the economy will not easily find equilibrium.

5. The classical economist believed in the automatic adjustment of the economy through wage-price flexibility. During times of unemployment and low GDP, the prices of factors of production decrease. This fall in cost shift the aggregate supply to the right by restoring earlier level of output and employment.

Answer: c. Because of lower demand, prices of all factors (input costs) are falling, and AS will shift to the right, compensating for any loss/left-shift in aggregate demand, returning the economy to equilibrium.

6. The sticky wage means that the wage remain as high during times of fall in sales of firms and low GDP and low unemployment. Because the workers and resource owners are working with their earlier contracts. They are unwilling to reduce their pay during times of falling sales.

Answer: b. Wages, contracts, rents are not easily scaled down with falling sales.