According to the new classical approach to the aggregate supply curve,the aggregate supply curve slopes upward because
A) increases in the price level result in lower real money balances.
B) higher current output results in higher desired investment.
C) higher prices result in higher levels of spending as consumers attempt to stay ahead of inflation.
D) businesses have difficulty in distinguishing relative price increases from general price increases.

Question

Quizplus · Accepted Answer

Businesses often have trouble distinguishing between an increase in the general price level (inflation) and an increase in the price of the specific goods or services they sell (relative price increase). This confusion can lead to an upward-sloping aggregate supply curve in the short run, as businesses may increase output in response to what they perceive as higher demand for their specific products, not realizing that the price increase is part of a general inflationary trend.

According to the New Classical Approach to the Aggregate Supply