If the actual price level exceeds the expected price level reflected in long-term contracts,
A) many firms will find production more profitable than they had expected and will increase the quantity of output supplied.
B) many firms will find production less profitable than they had expected and will decrease the quantity of output supplied.
C) many firms will find production more profitable than they had expected and will decrease the quantity of output supplied.
D) many firms will find production less profitable than they had expected and will increase the quantity of output supplied.

Question

Quizplus · Accepted Answer

When the actual price level exceeds the expected price level reflected in long-term contracts, many firms will find it more profitable to produce and will increase the quantity of output supplied. This is because they can sell their output for a higher price than they had anticipated when they signed the long-term contracts, leading to an increase in profits. Thus, the increase in profitability will incentivize firms to increase the quantity of output supplied.

If the Actual Price Level Exceeds the Expected Price Level