The misperceptionis theory of the short-run aggregate supply curve says that if the price level is higher than people expected, then some firms believe that the relative price of what they produce has

Question

a.

increased, so they decrease production.
b.

decreased, so they decrease production.
c.

increased, so they increase production.
d.

decreased, so they increase production.

Answer 1

The correct answer is:

c. increased, so they increase production.

According to the misperceptions theory of the short-run aggregate supply curve, if the actual price level is higher than what firms expected, they perceive the relative price of their products as having increased. This perception leads them to increase production in the short run, as they are motivated to take advantage of the higher prices they can charge for their goods and services.