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At the current level of output, suppose the actual price level is greater than the price...

At the current level of output, suppose the actual price level is greater than the price level that individuals expect (i.e., Pt > Pte). We know that: (a) output is currently below the natural level of output (b) the interest rate will tend to rise as the economy adjusts to this situation (c) the nominal wage will tend to decrease as individuals revise their expectations of the price level (d) the AS curve will tend to shift down over time (e) the LM curve will tend to shift down over time

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Answer #1

At the current level of output, if the actual price level is greater than expected price level, the real wage of the workers falls. If the the workers negotiate to increase their wages, aggregate supply curve tends to shift down to the left over time. Thus, option d is correct. Option a is incorrect because output is at current level of output. Option c is incorrect because it decreases real wage. Option b and e are incorrect because LM curve and interest rate does not comes in to the picture.Hence, the only correct option is d.

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