If the money supply grows 7% during the year,and people expected the money supply to grow by 5%,what happens to the short-run aggregate supply curve,according to the misperceptions theory?
A)It shifts down.
B)It shifts up.
C)It doesn't shift.
D)It shifts down unless Ricardian equivalence holds, in which case it doesn't shift.

Question

Quizplus · Accepted Answer

According to the misperceptions theory, if people expect the money supply to grow at a certain rate but it actually grows at a different rate, they may temporarily misperceive changes in prices and adjust production based on those misperceptions. If the money supply grows more than people expected (in this case, 7% versus 5%), then producers will react as though there has been an increase in demand for goods and services, and will increase production accordingly. However, this increase in production will be unsustainable once people realize that there has not been a corresponding increase in demand, and will result in a temporary increase in output and a corresponding decrease in prices. As a result, the short-run aggregate supply curve will shift down.

If the Money Supply Grows 7% During the Year,and People