The misperceptions theory of short-run aggregate supply curve says that quantity of output will decrease if the price level
A)decreases by more than expected so that firms believe the relative price of their output has decreased.
B)decreases by more than expected so that firms believe the relative price of their output has increased.
C)decreases by less than expected so that firms believe the relative price of their output has decreased.
D)decreases by less than expected so that firms believe the relative price of their output has increased.

Question

The misperceptions theory of short-run aggregate supply curve says that quantity of output will decrease if the price level
A)​decreases by more than expected so that firms believe the relative price of their output has decreased.
B)​decreases by more than expected so that firms believe the relative price of their output has increased.
C)​decreases by less than expected so that firms believe the relative price of their output has decreased.
D)​decreases by less than expected so that firms believe the relative price of their output has increased.

Quizplus · Accepted Answer

According to the misperceptions theory, if the price level decreases by more than expected, firms may think that the relative price of their output has decreased, which leads them to reduce their output. This means that the short-run aggregate supply curve slopes upward, as a decrease in the price level leads to a decrease in the quantity of output supplied. Therefore, choice A is the correct answer as it reflects this misperceptions theory.

The Misperceptions Theory of Short-Run Aggregate Supply Curve Says That