Both models of aggregate supply discussed in Chapter 14 imply that if the price level is lower than expected, then output ______ natural rate of output.
A) exceeds the
B) falls below the
C) equals the
D) moves to a different

Question

Quizplus · Accepted Answer

Both the sticky-wage model and the sticky-price model of aggregate supply suggest that if the actual price level is lower than what was expected, firms will produce less than they would have at the expected price level. This is because in the sticky-wage model, real wages are higher than anticipated, making labor more expensive and leading firms to reduce output. In the sticky-price model, some firms have set prices based on the expected price level and cannot adjust quickly, leading to reduced sales and production. Therefore, output falls below the natural rate of output.

Both Models of Aggregate Supply Discussed in Chapter 14 Imply