Questions
ECO102H1 S LEC0101 Week 9 Quiz - Full Model
Multiple dropdown selections
For each of the following, classify which type of shock it belongs to. 1) Unions successfully bargain to increase wages by an unexpectedly high 4% above inflation. [ Select ] supply spending financial 2) The government creates new tax incentives which encourage companies to increase their research and development spending. spending 3) Consumers start believing that future deflation is likely, so they reduce their consumption today. [ Select ] spending supply financial 4) After years of stability, financial institutions start seeking riskier investments to increase their profits. [ Select ] spending financial supply 5) International financiers begin to use the Canadian dollar more as their main currency for international transactions. [ Select ] supply spending financial
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Step-by-Step Analysis
Restating the task and the choices helps set the stage for the analysis. The question asks us to classify each scenario as a type of macroeconomic shock, choosing among supply, spending, or financial.
1) Unions successfully bargain to increase wages by an unexpectedly high 4% above inflation. [Select] supply, spending, financial
- Why 'supply' is the correct choice: A wage increase raises production costs for firms, which tends to reduce aggregate supply or shift the supply curve left rather than increase output. This is a classic supply-side shock (cost-push), as it directly affects the cost structure and willingness to produce at given prices.
- Why 'spending' is not correct: A spending shock would typically involve a sudden change in aggregate demand through autonomous spending or spending behavior, not a price/cost-side shift like wages. While wages influence demand in the long run, the immediate impact described is cost-driven on production, i.e., supply-side.
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