According to the misperceptions theory,when P

Question

According to the misperceptions theory,when P < P^e,output is ________ its full-employment level and the short-run aggregate supply curve must shift ________ to restore full employment. A)below; upward B)below; downward C)above; upward D)above; downward

Quizplus · Accepted Answer

According to the misperceptions theory, when the actual price level (P) is below the expected price level (P^e), firms believe that their relative prices have decreased leading to a decrease in their output. This causes a decrease in aggregate supply and output below the full-employment level. Therefore, to restore full employment, the short-run aggregate supply curve must shift downward.

According to the Misperceptions Theory,when P < Pe,output Is ________

According to the Misperceptions Theory,when P < P^e,output Is ________