Suppose the economy is in long-run equilibrium. If the government increases its expenditures, eventually the increase in aggregate demand causes price expectations to
A)rise.This rise in price expectations shifts the short-run aggregate supply curve to the right.
B)rise.This rise in price expectations shifts the short-run aggregate supply curve to the left.
C)fall.This fall in price expectations shifts the short-run aggregate supply curve to the right.
D)fall.This fall in price expectations shifts the short-run aggregate supply curve to the left.

Question

Quizplus · Accepted Answer

When the government increases its expenditures, it leads to an increase in aggregate demand. As demand increases, prices tend to rise. Over time, as people expect higher prices in the future, this expectation can lead to adjustments in wages and costs, which in turn can shift the short-run aggregate supply (SRAS) curve to the left, as it becomes more costly for firms to produce at any given price level.

Suppose the Economy Is in Long-Run Equilibrium