AD - AS Price Adjustment Speed

Hi,

Do the following thought experiment:

There has been an outward shift of the AD curve and we're at a point where P^e<P (call this price level P1)

We know that in the medium run, we must reach a point where P^e=P (call this price level P2)

We also know that P2>P1 - because the AS curve has to shift up for output to return to its natural rate.

So:
Actual prices have to get from P1 ---> P2 in the same time that expectations get from P^e<P1 ---> P^e=P2.
Thus, expectations have to rise more than actual prices.

I hope this helps
Best
Oliver