Suppose that the actual and expected price levels are initially equal,and that the expected price level falls.Which of the following will occur over the long run? (Hint: Recall the actual price level is on the vertical axis.)
A)The economy will move rightward along the short-run aggregate supply curve.
B)The economy will move leftward along the short-run aggregate supply curve.
C)The short-run aggregate supply curve will shift to the right.
D)The short-run aggregate supply curve will shift to the left.
E)The short-run aggregate supply curve will become flatter.

Question

Quizplus · Accepted Answer

When the expected price level falls, workers and firms adjust their expectations, leading to lower wage demands and production costs. This causes the short-run aggregate supply curve to shift to the right in the long run.

Suppose That the Actual and Expected Price Levels Are Initially