In the short run, the quantity of output that firms supply can deviate from the natural rate of output if the actual price level in the economy deviates from the expected price level. Several theories explain how this might happen.

For example, the misperceptions theory asserts that changes in the price level can temporarily mislead firms about what is happening to their output prices. Consider a soybean farmer who expects a price level of 100 in the coming year. If the actual price level turns out to be 90, soybean prices will (fall, rise, remain the same) , and if the farmer mistakenly assumes that the price of soybeans declined relative to other prices of goods and services, she will respond by (reducing, increasing) the quantity of soybeans supplied. If other producers in this economy mistake changes in the price level for changes in their relative prices, the unexpected decrease in the price level causes the quantity of output supplied to (rise above, fall below) the natural rate of output in the short run.

Fall | Reducing | Fall Below

Explanation:

Supply is the quantity of goods and services suppliers are willing to produce at a given price over a specific period of time. Quantity supplied and price tend to have a positive relationship. When price increases, suppliers are encouraged by higher sales and profits and hence their quantity supplied increases. On the other hand, when price decreases, quantity supplied decreases.

When soybean farmers expected prices to rise to 100, they are likely to increase their production and quantity supplied assuming they can enjoy large profits. However, when prices in fact are lower and is 90, it creates a fall in price since high quantity supplied creates a surplus in the economy.

When the soybean farmer assumes that price of soybean declines relative to other products, it is likely to discourage them due to lower profits and hence they will reduce quantity supplied. Decrease in price level will cause quantity supplied to fall below the natural rate of output in the short run.

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