According to the misperceptions theory, after an unanticipated increase in the money supply has occurred, the SRAS must shift to the ________ to restore general equilibrium; as it does so, the price level ________.
A) right; rises
B) right; falls
C) left; rises
D) left; falls

Question

Quizplus · Accepted Answer

The misperceptions theory suggests that when there is an unanticipated increase in the money supply, producers may initially perceive this as an increase in the relative price of their goods, leading them to increase output. However, as they realize the price level has risen generally, they reduce output, causing the SRAS to shift left, and the price level rises to restore equilibrium.

According to the Misperceptions Theory, After an Unanticipated Increase in the Money