Expectations of higher inflation rates cause a leftward shift in the short-run aggregate supply curve and usher in the stagflation phase of the inflation-unemployment cycle.

Question

Quizplus · Accepted Answer

When expectations of higher inflation rates arise, suppliers will expect higher prices for their inputs like labor and materials. This will cause a leftward shift in the short-run aggregate supply curve as suppliers are willing to produce less at each price level. This results in higher prices and lower output, leading to a stagnant economy with high inflation and unemployment - also known as stagflation.

Expectations of Higher Inflation Rates Cause a Leftward Shift in the Short-Run