Which of the following equations is most likely to represent short-run aggregate supply according to the misperceptions theory?
A)Y = 6000
B)Y = 6000 + 50(P - Pe)
C)P = 2
D)PY = 12,000

Question

Quizplus · Accepted Answer

According to the misperceptions theory, firms may mistakenly believe that changes in the overall price level reflect changes in the relative price of their specific goods or services. Therefore, the short-run aggregate supply curve in the misperceptions theory is upward sloping, with the equation Y = Yn + α(P - Pe), where Yn is potential output, P is the overall price level, Pe is the expected price level, and α is a constant. Option B is the only equation that includes both output (Y) and price (P) and has a term reflecting a difference between actual and expected price (P - Pe), making it the most likely to represent short-run aggregate supply in the misperceptions theory.

Which of the Following Equations Is Most Likely to Represent