Why does the short-run aggregate supply curve shift to the left in the long run, following an increase 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 downward, firms accept lower profits, and workers accept lower wages.

Question

Quizplus · Accepted Answer

With an increase in aggregate demand, there is a short-run increase in output and prices. However, in the long run, workers and firms adjust their expectations of wages and prices upward as they see that prices are rising. As a result, they push for higher wages and prices, which leads to an increase in the cost of production. This results in a leftward shift of the short-run aggregate supply curve, as higher prices result in a lower quantity of output supplied at any given price level.

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