A decrease in inflationary expectations that causes firms to decrease their prices shifts the
A) aggregate supply curve to the left.
B) aggregate demand curve to the left.
C) aggregate supply curve to the right.
D) aggregate demand curve to the right.

Question

Quizplus · Accepted Answer

A decrease in inflationary expectations causes firms to decrease their prices, which in turn increases the level of aggregate supply. Therefore, the aggregate supply curve shifts to the right. This is depicted in the graph as a movement from AS1 to AS2.

A Decrease in Inflationary Expectations That Causes Firms to Decrease