Along a short-run aggregate supply curve, a decrease in the price level causes:
A)firms to increase their production levels, as the lower prices will increase consumer demand.
B)no change in output to occur, as at the macroeconomic level, the price level does not affect supply.
C)firms to reduce their production levels.
D)production levels to rise as the price of inputs become cheaper.

Question

Quizplus · Accepted Answer

Along a short-run aggregate supply curve, a decrease in the price level results in a decrease in the production cost, which increases the profitability of firms. As a result, firms may reduce their production levels at higher prices because the reduced prices make it less profitable to produce the same quantity. Therefore, the decrease in price level results in a decrease in production levels, making option C the correct choice.

Along a Short-Run Aggregate Supply Curve, a Decrease in the Price