Question

6) According to the misperceptions theory, when P < Pe, output is ________ its full-employment level and the short-run aggregate supply curve must shift ________ to restore full employment. A) below; upward B) below; downward C) above; upward D) above; downward

Answer 1

Answer: C

Above, Upward

Step-by-step explanation:

This theory states that when a seller sees the price of its products decline, it makes an erroneous assumption that their relative prices have also declined. Since output is already above full employment level, the short run curve must shift upward to account for changes in the price level leading to an upward-sloping aggregate-supply curve.