Asked by priya tripathi on May 23, 2024
Verified
Suppose the economy is in long-run equilibrium. If the government increases its expenditures, eventually the increase in aggregate demand causes price expectations to
A) rise.This rise in price expectations shifts the short-run aggregate supply curve to the right.
B) rise.This rise in price expectations shifts the short-run aggregate supply curve to the left.
C) fall.This fall in price expectations shifts the short-run aggregate supply curve to the right.
D) fall.This fall in price expectations shifts the short-run aggregate supply curve to the left.
Aggregate Demand
The aggregate bid for all goods and services in an economy, pegged at a given price level throughout an agreed-upon time period.
Price Expectations
Anticipations or forecasts by consumers and businesses about future prices, which can influence their current buying and selling decisions.
Short-run Aggregate Supply
The total supply of goods and services that firms in an economy plan on selling during a short time period, taking into consideration the price levels of the market.
- Comprehension of the determinants influencing movements in aggregate supply and demand.
- Ability to analyze the effects of fiscal and monetary policy on the economy.
Verified Answer
SC
Samarth ChakankarMay 29, 2024
Final Answer :
B
Explanation :
When the government increases its expenditures, it leads to an increase in aggregate demand. As demand increases, prices tend to rise. Over time, as people expect higher prices in the future, this expectation can lead to adjustments in wages and costs, which in turn can shift the short-run aggregate supply (SRAS) curve to the left, as it becomes more costly for firms to produce at any given price level.
Learning Objectives
- Comprehension of the determinants influencing movements in aggregate supply and demand.
- Ability to analyze the effects of fiscal and monetary policy on the economy.