Suppose the price level falls but suppliers only notice that the price of their particular product has fallen. Thinking there has been a fall in the relative price of their product, they cut back on production. This is a demonstration of the

Question

a. sticky-price theory of the short-run aggregate-supply curve.
b. misperceptions theory of the short-run aggregate-supply curve.
c. sticky-wage theory of the short-run aggregate-supply curve.
d. classical dichotomy theory of the short-run aggregate-supply curve.

Answer 1

The scenario described demonstrates the misperceptions theory of the short-run aggregate-supply curve. According to this theory, suppliers may misinterpret changes in the price level as changes in the relative prices of their products, leading them to adjust their production based on incorrect perceptions of the market conditions. Thus, the correct answer is:

b. misperceptions theory of the short-run aggregate-supply curve.