In the figure above, suppose that the economy traces the path E0 to E1 to E1'. We might conclude that ________ fiscal or monetary policy shifted the AD curve with price expectation first ________ then ________.
A) expansionary; constant; revised upward
B) expansionary; revised upward; constant
C) contractionary; revised upward; constant
D) contractionary; constant; revised downward

Question

Quizplus · Accepted Answer

The economy moved from point E0 to E1 to E1', which indicates an expansionary fiscal or monetary policy since output increased from Y0 to Y1 and then to Y1'. The price expectations were constant initially since the AD curve shifted from AD0 to AD1, but were revised upward later since the new equilibrium moved from E1 to E1'. Therefore, choice A is the correct answer.

In the Figure Above, Suppose That the Economy Traces the Path