Figure 15-3 -As shown in Figure 15-3, if people behave according to rational 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 105 and then remain at 105. B)directly from 100 to 110 and then remain at 110. 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

Under rational expectations theory, people anticipate the effects of economic policies, leading to immediate adjustments. Thus, the price level would move directly to the new equilibrium at 110.

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