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16 February, 14:07

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.

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  1. 16 February, 15:33
    0
    The correct answer is option b.

    Explanation:

    In the long run, if the government increases expenditure, it will cause the aggregate demand to increase. This increase in aggregate demand will cause the demand curve to move to the right.

    This rightward shift in the aggregate demand curve will cause price expectations to rise. As the producers expect the price to rise in the future this rise in price expectations will cause the short-run supply curve to shift to the left. At each price level, the producers will supply fewer outputs than earlier. They will wait for the price to increase to sell their products.
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