Suppose that the actual and expected price levels are initially equal,and that the expected price level rises.Which of the following will occur over the long run? (Hint: Recall the actual price level is on the vertical axis.)
A)The economy will move rightward along the short-run aggregate supply curve.
B)The economy will move leftward along the short-run aggregate supply curve.
C)The short-run aggregate supply curve will shift to the right.
D)The short-run aggregate supply curve will shift to the left.
E)The short-run aggregate supply curve will become flatter.

Question

Quizplus · Accepted Answer

When the expected price level rises, firms will increase their prices and the actual price level will eventually rise as well. This causes a decrease in the purchasing power of money, which reduces the demand for goods and services, causing a decrease in output and employment. In the long run, wages and other input prices will adjust to the higher price level, shifting the short-run aggregate supply curve to the left. Therefore, choice D is the best answer.

Suppose That the Actual and Expected Price Levels Are Initially