Suppose the actual and expected price levels in an economy are initially equal.However,the actual price level falls eventually due to a change in economic conditions.Which of the following will occur over the long run?
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

A fall in actual price level indicates that the economy is experiencing a recessionary gap, where actual output is below potential output. This will lead to a decrease in the quantity of goods and services supplied in the short run, causing the short-run aggregate supply curve to shift to the left. Over the long run, this decrease in output may lead to adjustments in the economy that result in an increase in potential output, causing the long-run aggregate supply curve to shift to the right. However, the question only asks about the short run, so the answer is D.

Suppose the Actual and Expected Price Levels in an Economy