According to the misperceptions theory,when P

Question

According to the misperceptions theory,when P < Pe,output is ________ its full-employment level and the short-run aggregate supply curve must shift ________ to restore full employment.
A)below; upward
B)below; downward
C)above; upward
D)above; downward

Quizplus · Accepted Answer

According to the misperceptions theory, when P (actual price level) is less than Pe (expected price level), it creates a perception among producers that there is a fall in demand for their product, causing them to reduce output. This leads to a situation where output is below its full-employment level. To restore full-employment level, the short-run aggregate supply curve must shift downward, which will result in a decrease in the actual price level and an increase in output to the full-employment level. Therefore, the correct option is B: below; downward.

According to the Misperceptions Theory,when P < Pe,output Is ________