Suppose the expected price level exceeds the actual price level.How will this affect production in the short run?
A) Firms will increase production.
B) Firms will decrease production.
C) Firms will maintain production but increase prices.
D) Firms will maintain production but decrease prices.

Question

Suppose the expected price level exceeds the actual price level.How will this affect production in the short run?  
A) Firms will increase production. 
B) Firms will decrease production. 
C) Firms will maintain production but increase prices. 
D) Firms will maintain production but decrease prices.

Quizplus · Accepted Answer

When the expected price level exceeds the actual price level, firms find that the prices they can charge for their products are lower than they anticipated. This typically leads to a decrease in production as firms adjust to the lower-than-expected revenue.

Suppose the Expected Price Level Exceeds the Actual Price Level