Which of the following best describes the relationship between the actual price level and the expected price level in the long run?
A) The actual price level may be less than the expected price level.
B) The actual price level may be more than the expected price level.
C) The actual price level and the expected price level are equal.
D) The actual price level will likely be indeterminate.

Question

Which of the following best describes the relationship between the actual price level and the expected price level in the long run?  
A) The actual price level may be less than the expected price level. 
B) The actual price level may be more than the expected price level. 
C) The actual price level and the expected price level are equal. 
D) The actual price level will likely be indeterminate.

Quizplus · Accepted Answer

In the long run, the actual price level and the expected price level are expected to be equal due to the flexibility of prices and wages. This relationship is based on the assumption of the neutrality of money in the long run, which implies that changes in the money supply only affect nominal variables, such as prices, while real variables, such as output and employment, are determined by factors like technology, preferences, and resources. Therefore, in the long run, the actual price level should adjust to match the expected price level, which is defined by the level of aggregate demand, supply, and inflation expectations. However, in the short run, due to frictions in the adjustment process, the actual price level may deviate from the expected price level, leading to fluctuations in output, employment, and inflation.

Which of the Following Best Describes the Relationship Between the Actual