How do changes in inflation expectations impact the short-run aggregate supply curve and the long-run aggregate supply curve?
A) Expectations for inflation to rise will cause short-run and long-run aggregate supply to increase.
B) Expectations for inflation to rise will cause short-run and long-run aggregate supply to decrease.
C) Expectations that inflation will rise will cause movements along both curves but would cause neither curve to shift.
D) Expectations that inflation will rise will cause short-run aggregate supply to decrease and long-run aggregate supply to remain constant.

Question

Quizplus · Accepted Answer

In the short run, if inflation expectations rise, firms anticipate higher costs and may reduce supply, shifting the short-run aggregate supply curve left. In the long run, the aggregate supply is determined by factors like technology and resources, not inflation expectations, so it remains constant.

How Do Changes in Inflation Expectations Impact the Short-Run Aggregate