Suppose that the actual price level and the expected price level are initially equal, and that the expected price level rises.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 that the actual price level and the expected price level are initially equal, and that the expected price level rises.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 rises, firms will increase their prices leading to higher production costs, which ultimately shifts the short-run aggregate supply curve to the left. Therefore, choice D is the correct answer.

Suppose That the Actual Price Level and the Expected Price