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. A decrease in inflationary expectations that causes firms to decrease 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

A decrease in inflationary expectations that causes firms to decrease their prices would shift the aggregate supply curve to the left (AS₀) as shown in the diagram. This is because firms are now able to produce goods and services at lower costs, which means they can supply more output at any given price level. Thus, the economy moves along the aggregate demand curve to a lower price level (Point B) and a higher output level (Point C).