Why does the short-run aggregate supply curve shift to the right in the long run, following a decrease in aggregate demand?
A)Workers and firms adjust their expectations of wages and prices downward and they accept lower wages and prices.
B)Workers and firms adjust their expectations of wages and prices downward and they push for higher wages and prices.
C)Workers and firms adjust their expectations of wages and prices upward and they push for higher wages and prices.
D)Workers and firms adjust their expectations of wages and prices upward and they accept lower wages and prices.
E)Workers and firms adjust their expectations of output and price levels upward and they thus accept lower output as normal.

Question

Quizplus · Accepted Answer

In the short run, a decrease in aggregate demand causes firms to reduce their production output and raise their prices in order to maintain profitability. However, in the long run, workers and firms adjust their expectations of wages and prices downward, as they realize that the economy has entered a recession and that demand is lower. As a result, they accept lower wages and prices, which lowers the costs of production for firms and leads to an increase in the short-run aggregate supply. This shift to the right in the short-run aggregate supply curve means that firms are now willing and able to produce more output, even at lower prices, which leads to a decrease in the price level and an increase in the quantity of output produced in the economy.

Why Does the Short-Run Aggregate Supply Curve Shift to the Right