12.3 Shocks to the System Refer to the information provided in Figure 12.3 below to answer the questions that follow. Figure 12.3 -Refer to Figure 12.3. Assume the economy is currently at Point A on aggregate supply curve AS₁. An increase in inflationary expectations that causes firms to increase their prices A) shifts the aggregate supply curve to AS₀. B) shifts the aggregate supply curve to AS₂. C) moves the economy to Point C on aggregate supply curve AS₁. D) moves the economy to Point B on aggregate supply curve AS₁.

Question

Quizplus · Accepted Answer

An increase in inflationary expectations that causes firms to increase their prices will shift the aggregate supply curve to the left, from AS₁ to AS₂, resulting in a higher price level and lower real GDP. Therefore, the economy will move to Point B on the new curve.