In the short run, the quantity of output that firms supply can deviate from the
ID: 1205897 • Letter: I
Question
In the short run, the quantity of output that firms supply can deviate from the natural rate of output if the actual price level in the economy deviates from the expected price level. Several theories explain how this might happen.
A) For example, the misperceptions theory asserts that changes in the price level can temporarily mislead firms about what is happening to their output prices. Consider a soybean farmer who expects a price level of 100 in the coming year. If the actual price level turns out to be 90, soybean prices will ________ (Rise/Fall/Remain the same) , and if the farmer mistakenly assumes that the price of soybeans declined relative to other prices of goods and services, she will respond by _________(Increase/Decrease) the quantity of soybeans supplied. If other producers in this economy mistake changes in the price level for changes in their relative prices, the unexpected decrease in the price level causes the quantity of output supplied to ___________ (Rise above/Fall below) the natural rate of output in the short run.
Suppose the economy's short-run aggregate supply (AS) curve is given by the following equation:
Suppose the natural rate of output is $50 billion of real GDP and that people expect a price level of 100.
B) On the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. Then use the orange line segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 90, 95, 100, 105, and 110.
C) The short-run quantity of output supplied by firms will fall below the natural rate of output when the actual price level ________(rise above/fall below) the price level that people expected.
Quantity of Output SuppliedExplanation / Answer
c. When price falls below the expected level, supply decreases below the natural rate of output.
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