Figure 15-3 -As shown in Figure 15-3, if people behave according to adaptive expectations theory, an increase in the aggregate demand curve from AD₁ to AD₂ will cause the price level to move A)directly from 100 to 110 and then remain at 110. B)directly from 100 to 105 and then remain at 105. C)from 100 to 105 initially and then eventually move back to 100. D)from 100 to 105 initially and then eventually move to 110.

Question

Quizplus · Accepted Answer

Adaptive expectations theory suggests that people adjust their expectations based on past experiences. Initially, the price level moves to 105 due to increased demand, but as people adapt their expectations, prices continue to rise to 110.

Figure 15-3 -As Shown in Figure 15-3, If People Behave According to Behave