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Chapter 6: Q3. (page 257)

Would the same decision be rational now, in the aftermath of the Great Recession? Explain.

Short Answer

Expert verified

The decision to shut down stores few stores, as Montgomery did during the 1930s depression, would not be rational in the aftermath of the Great Recession. Shutting down stores means a decline in production and market share when all the firms are competing to increase their profit and capture the market.

Step by step solution

01

Explanation

The Great Recession resulted from the credit crash in the US financial sector. The investments dropped down, and the aggregate demand fell rapidly. The credit crunch spread to the entire economy and across the borders also.

The governments decided to adjust the interest rates and stimulate the economies to spur growth. Otherwise, the economies would have drowned in a greater recession, which happened at the time of the Great Depression. Due to an increase in the rate of return and other stimuli from the government, the aggregate demand bounced back in some time.

In the time of expansion or recovery, shutting down stores would not have resulted in a profitable scenario. Rather, it would lead to lowered returns on the overall investments as the production would fall and the market share would have also declined.

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Most popular questions from this chapter

Why was it profitable for Montgomery Ward to close some of its stores during the Great Depression?
  1. Which of the following questions involve microeconomics, and which involve macroeconomics? In each case, explain your answer.
  2. Why did consumers switch to smaller cars in 2008?
  3. Why did overall consumer spending slow down in 2008?
  4. Why did the standard of living rise more rapidly in the first generation after World War II than in the second?
  5. Why have starting salaries for students with economics degrees risen sharply of late?
  6. What determines the choice between rail and road transportation?
  7. Why did laptops get much cheaper between 2000 and 2017?
  8. Why did inflation fall in the 2010s?

Which of these sound like inflation, which sound like deflation, and which are ambiguous?

  1. Gasoline prices are up 10%, food prices are down 20%, and the prices of most services are up 1– 2%.
  2. Gas prices have doubled, food prices are up 50%, and most services seem to be up 5% or 10%.
  3. Gas prices haven’t changed, food prices are way down, and services have gotten cheaper, too.

Many poor countries have high rates of population growth. What does this imply about the long-run growth rates of overall output that they must achieve in order to generate a higher standard of living per person?

Which of the following reflect comparative advantage, and which reflect macroeconomic forces?

  1. Thanks to the development of huge oil sands in the province of Alberta, Canada has become a BUSINESS CASE exporter of oil and an importer of manufactured goods.
  2. Like many consumer goods, the Apple iPad is assembled in China, although many of the components are made in other countries.
  3. Since 2002, Germany has been running huge trade surpluses, exporting much more than it imports.
  4. The United States, which had roughly balanced trade in the early 1990s, began running large trade deficits later in the decade, as the technology boom took off.
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