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 A)labor to adjust nominal wages sluggishly. B)the aggregate supply curve to shift from SRAS₁ to SRAS₂ C)the price level to eventually rise from 100 to 110. D)All of the above.

Question

Quizplus · Accepted Answer

Adaptive expectations theory suggests that people adjust their expectations based on past experiences. Therefore, when aggregate demand increases, nominal wages adjust slowly (A), the short-run aggregate supply curve shifts as expectations catch up (B), and the price level eventually rises (C).

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