According to the misperceptions theory of the short-run aggregate supply curve, if the price level increases less than people expect, how do firms change their behaviour?
A) They believe that the relative price has decreased, so they increase production.
B) They believe that the relative price has decreased, so they decrease production.
C) They believe that the relative price has increased, so they increase production.
D) They believe that the relative price has increased, so they decrease production.

Question

Quizplus · Accepted Answer

When the price level increases less than expected, firms may perceive their relative price as having decreased, leading them to decrease production due to the perceived lower profitability.

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