How does the misperception effect explain why a short-run aggregate supply curve is upward sloping?
A)Because the costs of production rise as the price level rises.
B)Because of fixed wage labour contracts.
C)Because people mistake changes in aggregate demand for changes in the demand for their goods relative to other goods and services.
D)Because profit margins fall as the price level rises.

Question

Quizplus · Accepted Answer

According to the misperception effect, producers may mistakenly believe that an increase in the overall price level is due to an increase in the demand for their specific goods and services, rather than a shift in aggregate demand. This leads them to increase production and output, which requires hiring more labor and input. This causes aggregate supply to increase in the short-run, even though prices have risen. Therefore, the short-run aggregate supply curve is upward sloping due to the misperception effect.

How Does the Misperception Effect Explain Why a Short-Run Aggregate