The inflation adjustment line is horizontal because firms adjust output before price.

Question

Quizplus · Accepted Answer

When the demand for goods and services decreases due to inflation, firms will first adjust their output rather than increasing the prices of their products. This is because increasing prices may result in an even greater decrease in demand, while adjusting output allows firms to maintain their market share while still adjusting to changes in consumer behavior. As a result, the inflation adjustment line is horizontal because output adjustments precede price adjustments.

The Inflation Adjustment Line Is Horizontal Because Firms Adjust Output