The short-run aggregate supply curve shows that higher-than-expected-inflation will increase output and lower-than-expected-inflation will decrease output.

Question

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The short-run aggregate supply curve is upward sloping, indicating that as prices (or inflation) increase more than expected, firms are willing to produce and sell more goods because the real cost of production is relatively lower, leading to an increase in output. Conversely, if inflation is lower than expected, firms reduce output because the real cost of production is relatively higher.

The Short-Run Aggregate Supply Curve Shows That Higher-Than-Expected-Inflation Will Increase