Which of the following statements is true?
a | In the long-run, all prices are flexible. Firms have “enough” time to fully adjust their prices to the new market conditions. |
b | In the short-run, prices are “sticky”. |
c | Prices are “sticky” because firms know that consumers prefer stable prices, and firms want to avoid “price wars”. |
d | All of the above. |
e | Only a) and b) |
Which of the following statements is true?
a | Regarding the causes of a recession, Minsky believed that severe recessions are often immediately followed by large asset-price bubbles. |
b | Asset-price bubbles are periods during which euphoria and debt-fueled speculation cause the price of one or more financial assets to irrationally skyrocket before collapsing down to more realistic levels. |
c | Economists of the so-called Austrian School |
d | All of the above. |
e | Only b) and c) |
1. Here, option a and b are correct as prices are flexible in the long-run but are sticky in the short-run. Here, option c is incorrect, as price stickiness arises due to inability of the prices to adjust in a short-period of time with the changes in demand and supply. Here, option e is the correct answer.
2. Here, options b and c are correct as asset-price bubbles creates a situation in which prices are unreasonably high which Austrian school economists suggests are a result of the monetary actions taken by the government . Option a is incorrect because asset-price bubbles may lead to recession and not the reverse case. Thus, option e is the correct answer.
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