QUESTION 1Select all correct statements below.Note: This is a multiple-answer question; thus, more than one option may be correct. a. To model fluctuations in output, we assume flexible prices. b. We assume prices are flexible in the short run. c. To model economic development, we assume flexible prices. d. In the long run, prices adjust to ensure market clearing.
Question
QUESTION 1Select all correct statements below.Note: This is a multiple-answer question; thus, more than one option may be correct. a. To model fluctuations in output, we assume flexible prices. b. We assume prices are flexible in the short run. c. To model economic development, we assume flexible prices. d. In the long run, prices adjust to ensure market clearing.
Solution
The correct statements are:
a. To model fluctuations in output, we assume flexible prices. d. In the long run, prices adjust to ensure market clearing.
Explanation:
Statement a is correct because flexible prices allow for changes in output. If prices are rigid, they cannot adjust quickly to changes in supply or demand, which can cause fluctuations in output.
Statement b is incorrect because in the short run, prices are often sticky due to factors like menu costs, contracts, and coordination problems. This means they do not adjust immediately to changes in the economy.
Statement c is incorrect because economic development is a long-term process that involves more than just price flexibility. It also involves factors like technological progress, capital accumulation, and improvements in human capital.
Statement d is correct because in the long run, prices are flexible and can adjust to changes in supply and demand to ensure that markets clear. This means that the quantity supplied equals the quantity demanded.
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