Final answer:
Firms and workers expecting higher price levels leads to an upward movement along the long-run aggregate supply (LRAS) due to higher wage demands and nominal wages, without affecting the LRAS itself. LRAS reflects potential GDP and remains constant as it's determined by factors such as technology and resources, meaning there is no increase or decrease in the long-run aggregate supply.
Step-by-step explanation:
Expectations of rising price levels by firms and workers can lead to adjustments in wage demands and production costs that shift the short-run aggregate supply (SRAS) curve but do not affect the long-run aggregate supply (LRAS).
When firms and workers expect the price level to rise, workers will demand higher wages to compensate for the expected increase in prices, and employers are likely to agree if they also expect to receive higher prices for their products.
This leads to an immediate shift of the SRAS curve to SRAS2, representing increased nominal wages without a change in real GDP, resulting in an upward movement along the LRAS curve. However, this does not cause the LRAS to increase or decrease; it remains unchanged because the potential GDP stays constant in the long run.
This analysis is based on the assumption that wages and prices are flexible and that the economy can quickly adjust to new expectations without stickiness. It's worth noting that, according to the neoclassical perspective, in the long run, changes in aggregate demand affect only the price level and not the real GDP, which is determined by the LRAS, reflecting the potential GDP determined by factors like technology and resources.
In summary, if firms across the economy anticipate a rising price level, but their production costs do not go up at the same time, the profit motive can lead to increased production, as depicted by a shift in the SRAS curve. In contrast, the LRAS remains the same as it is determined by the productive capacity of the economy.