Suppose the price level falls but suppliers only notice that the price of their particular product has fallen. Thinking there has been a fall in the relative price of their product, they cut back on production. This is a demonstration of the
A) misperceptions theory of the short-run aggregate supply curve.
B) classical dichotomy theory of the short-run aggregate supply curve.
C) sticky-price theory of the short-run aggregate supply curve.
D) sticky-wage theory of the short-run aggregate supply curve.

Question

Quizplus · Accepted Answer

This scenario aligns with the misperceptions theory, which proposes that suppliers may misinterpret changes in the economy, leading to changes in production that are not optimal for the overall economy. The fact that suppliers only notice the change in price for their product and not the general price level supports this theory. The classical dichotomy theory, on the other hand, suggests that changes in the price level do not affect the short-run aggregate supply curve, while sticky-price and sticky-wage theories propose that prices and wages are slow to adjust in the short-run, but do not account for misinterpretations of changes in the economy by suppliers.

Suppose the Price Level Falls but Suppliers Only Notice That