An increase in inflationary expectations that causes an increase in the growth rate of firms' prices shifts the:
A) aggregate demand curve to the right.
B) aggregate supply curve to the left.
C) aggregate demand curve to the left.
D) aggregate supply curve to the right.

Question

Quizplus · Accepted Answer

An increase in inflationary expectations implies that firms expect higher prices for their output in the future. To offset the higher costs of production, firms will increase their prices in the present. This, in turn, causes an increase in the overall price level and a leftward shift in the aggregate supply curve.

An Increase in Inflationary Expectations That Causes an Increase in the Growth