If inflation is underestimated by decision makers in the economy when it is rising,what will the shape of the SRAS curve tend to be?
A)downward sloping
B)horizontal
C)upward sloping
D)vertical

Question

Quizplus · Accepted Answer

If inflation is underestimated by decision makers in the economy when it is rising, it means that they believe that there is less inflation than there really is. Therefore, they will keep producing at the same level, expecting the demand to remain unchanged. This creates a situation in which the actual price level is higher than what producers believe it to be, leading to unexpected profits. As a result, producers will increase production levels to try to capitalize on this profit opportunity. This will shift the SRAS curve upward, indicating that at every given price level firms are willing to supply greater quantities of output in response to unexpectedly high demand.

If Inflation Is Underestimated by Decision Makers in the Economy