Suppose the actual and expected price levels are initially equal, and the expected price level falls.Which of the following will occur over the long run?
A) The economy will move rightward along the short-run aggregate supply curve.
B) The economy will move leftward along the short-run aggregate supply curve.
C) The short-run aggregate supply curve will shift to the right.
D) The short-run aggregate supply curve will shift to the left.

Question

Suppose the actual and expected price levels are initially equal, and the expected price level falls.Which of the following will occur over the long run?  
A) The economy will move rightward along the short-run aggregate supply curve. 
B) The economy will move leftward along the short-run aggregate supply curve. 
C) The short-run aggregate supply curve will shift to the right. 
D) The short-run aggregate supply curve will shift to the left.

Quizplus · Accepted Answer

When the expected price level falls, producers anticipate lower prices for their products in the future. This leads to adjustments in wage rates and other costs, making production more profitable at existing prices. As a result, the short-run aggregate supply (SRAS) curve shifts to the right, indicating an increase in the total output supplied at every price level.

Suppose the Actual and Expected Price Levels Are Initially Equal