An increase in the expected price level shifts

Question

BlackTom AI · Accepted Answer

When analyzing how an increase in the expected price level affects the economy, start by considering the different supply curves involved. 
Option 1: 'both the short-run and long-run aggregate supply curves to the left.' This is not correct because a higher expected price level mainly affects input costs and nominal wages in the short run, not the long-run productive capacity. In the long run, prices and wages fully adjust, leaving LRAS unchanged. 
Option 2: 'neither the long-run aggregate supply curve nor the short-run aggregate supply curve to the left.' Since expectations about higher prices raise input costs (wages, materials) in the short run, the short-run aggregate supply typically shifts left, so this option ignores the immediate effect on SRAS and is incorrect. 
Option 3: 'the long-run aggregate supply curve to the left but does not affect the short-run aggregate supply curve.' This misattributes the effect: an expected price rise does not shift LRAS (which reflects an economy’s potential output given resources and technology). The long-run curve is anchored by real factors, while price expectations affect the short run first. 
Option 4: 'the short-run aggregate supply curve to the left but does not affect the long-run aggregate supply curve.' This matches the standard distinction: higher expected prices raise input costs and reduce real but sticky wages’ competitiveness, causing SRAS to shift left in the short run; in the long run, prices adjust and LRAS remains unchanged. 
Thus, the correct interpretation is that the SRAS shifts left with higher expected prices, while LRAS is unaffected in the long run.

An increase in the expected price level shifts

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