How do changes in inflation expectations impact the short-run aggregate supply curve and the long-run aggregate supply curve?
A) Expectations that inflation will rise will cause short-run and long-run aggregate supply to increase.
B) Expectations that inflation will rise will cause short-run and long-run aggregate supply to decrease.
C) Expectations that inflation will rise will cause movements along both curves but would cause neither curve to shift.
D) Expectations that inflation will rise will cause short-run aggregate supply to decrease and long-run aggregate supply to remain constant.

Question

Quizplus · Accepted Answer

Expectations of inflation rising signal to firms that they will have to pay higher prices for inputs in the short run. As a result, the short-run aggregate supply curve shifts to the left, decreasing output and increasing the price level. However, in the long run, firms will adjust their expectations and increase their production capacity, causing the long-run aggregate supply curve to shift back to its potential output level. Therefore, expectations of inflation rising only impact the short-run aggregate supply curve, not the long-run aggregate supply curve, causing a decrease in short-run aggregate supply and no change in the long-run aggregate supply curve.

How Do Changes in Inflation Expectations Impact the Short-Run Aggregate