According to the misperceptions theory of short-run aggregate supply, if a firm thought that inflation was going to be 5 percent and actual inflation was 6 percent, then the firm would believe that the relative price of what it produce had
A)increased, so it would increase production.
B)increased, so it would decrease production.
C)decreased, so it would increase production.
D)decreased, so it would decrease production.

Question

Quizplus · Accepted Answer

The misperceptions theory suggests that if a firm expects lower inflation than what actually occurs, it may mistakenly believe that the real price of its products has increased relative to others. This could lead the firm to increase production, thinking it can sell its goods at relatively higher prices.

According to the Misperceptions Theory of Short-Run Aggregate Supply, If