According to the misperceptions theory,an unanticipated decrease in the money supply shifts the AD curve ________,causing output to ________ in the short run.
A)up and to the right; rise
B)up and to the right; fall
C)down and to the left; rise
D)down and to the left; fall

Question

Quizplus · Accepted Answer

The misperceptions theory suggests that people may initially misperceive a decrease in the money supply as a decrease in relative prices. This leads to a fall in overall demand, causing a leftward shift of the aggregate demand (AD) curve. As a result, output decreases in the short run, as shown by a movement down and to the left along the aggregate supply curve. Therefore, the correct answer is D, down and to the left; fall.

According to the Misperceptions Theory,an Unanticipated Decrease in the Money