Question 23

Increase in expected inflation shifts AS left

An increase in expected inflation leads to a leftward shift in the aggregate supply (AS) curve, as producers anticipate higher costs and may reduce output in response to rising price levels.

A) AD left

This option is incorrect because an increase in expected inflation does not directly shift the aggregate demand (AD) curve to the left. Instead, inflation expectations typically lead to higher demand as consumers and businesses anticipate rising prices, which can shift AD to the right.

B) AS left

This option is correct. When expected inflation rises, production costs are likely to increase, causing suppliers to reduce the quantity of goods and services they are willing to offer at previous price levels. This results in a leftward shift of the aggregate supply curve.

C) Phillips left

The Phillips curve depicts the relationship between inflation and unemployment. An increase in expected inflation does not shift the Phillips curve to the left; rather, it may cause a movement along the curve or a shift in the curve itself, depending on how inflation affects unemployment expectations.

D) Nominal rates down

This statement is incorrect as an increase in expected inflation typically leads to higher nominal interest rates, not lower. Lenders demand higher rates to compensate for the decrease in purchasing power of money over time due to inflation.

Conclusion

The correct answer, B, reflects the economic principle that rising expected inflation increases production costs, leading to a decrease in aggregate supply. Options A, C, and D fail to align with the effects of inflation expectations on the AS curve and interest rates, thereby confirming the correctness of option B.