Suppose the expected price level exceeds the actual price level.How will this affect output?
A) Firms will expand output, hoping that prices will rise.
B) Firms will expand output if some resources are fixed by contracts.
C) Firms will reduce output if some resource prices are fixed by contracts.
D) Firms will reduce output if workers suffer from money illusion.

Question

Suppose the expected price level exceeds the actual price level.How will this affect output?  
A) Firms will expand output, hoping that prices will rise. 
B) Firms will expand output if some resources are fixed by contracts. 
C) Firms will reduce output if some resource prices are fixed by contracts. 
D) Firms will reduce output if workers suffer from money illusion.

Quizplus · Accepted Answer

If the expected price level exceeds the actual price level, firms will reduce output if some resource prices are fixed by contracts. In this scenario, the prices of these fixed resources do not adjust quickly enough to match the expected price level, and as a result, firms will reduce output to avoid losses.

Suppose the Expected Price Level Exceeds the Actual Price Level