If business decision makers expect that the inflation rate will increase in the near future,
A) long-run aggregate supply will increase.
B) long-run aggregate supply will decrease.
C) short-run aggregate supply will increase.
D) short-run aggregate supply will decrease.

Question

Quizplus · Accepted Answer

If business decision makers expect inflation to increase in the near future, they will likely raise their prices in order to maintain their profit margins. This will lead to a decrease in short-run aggregate supply. Over the long run, businesses may expand production capacity in response to higher prices, which could lead to an increase in long-run aggregate supply. However, this is not an immediate or certain response to inflation expectations.

If Business Decision Makers Expect That the Inflation Rate Will