If the expected price level falls below the actual price level,
A)the inflation rate must be negative
B)the inflation rate must be positive
C)production becomes less attractive to firms
D)production becomes more attractive to firms
E)the short-run aggregate supply curve is negatively sloped

Question

Quizplus · Accepted Answer

When the expected price level falls below the actual price level, the inflation rate must be negative, but it also makes production more attractive to firms as they can produce goods at a lower cost than expected. This is because the prices of inputs used in production will also have fallen. Therefore, the best choice is D, which states that production becomes more attractive to firms.

If the Expected Price Level Falls Below the Actual Price