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 economy to move A)directly from E₁ to E₃ and then remain at E₃. B)directly from E₁ to E₂ and then remain at E₂. C)from E₁ to E₂ initially and then eventually move back to E₁. D)from E₁ to E₂ initially and then eventually move to E₃.

Question

Quizplus · Accepted Answer

Under rational expectations, people anticipate the effects of policy changes, so the economy moves directly to the new long-term equilibrium at E3 without temporary deviations.

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