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Suppose that prices are sticky in the short-run. Which of the following best describes the economy's response to a negative demand shock?

a. Firms' inventories will decrease, causing them to increase production Ultimately, real GOP will increase and unemployment wil decres.
b. Firms' Inventories will increase, causing them to cut production Vitimately, real GDP will decrease and unemployment will decrease.
c. Firms' inventories will increase, causing them to cut production Ultimately, real GDP will increase and unemployment will increase.
d. Firms' inventories will increase, causing them to cut production. Ultimately, real GOP will decrease and unemployment will increase.

Sagot :

Answer: Firms' inventories will increase, causing them to cut production. Ultimately, real GDP will decrease and unemployment will increase

Explanation:

A negative demand shock simply means when there is a reduction in demand.

If prices are sticky in the short-run, the economy's response to a negative demand shock will be that there'll be an increase in the firms' inventories, causing them to cut production. Ultimately, real GDP will decrease and unemployment will increase.

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