Figure 17-3
-Refer to Figure 17-3. Suppose the economy is at point a. Assume that (1) the public's expectations are completely rational; (2) markets allocate resources instantaneously; and (3) the economy is at its natural level of employment. The theoretical adjustment path resulting from an increase in aggregate demand according to the rational expectations hypothesis is
A) a to c to d.
B) a to b to d.
C) a to d.
D) a to b and back to a.

Question

Figure 17-3 
-Refer to Figure 17-3. Suppose the economy is at point a. Assume that (1) the public's expectations are completely rational; (2) markets allocate resources instantaneously; and (3) the economy is at its natural level of employment. The theoretical adjustment path resulting from an increase in aggregate demand according to the rational expectations hypothesis is
A) a to c to d. 
B) a to b to d. 
C) a to d. 
D) a to b and back to a.

Quizplus · Accepted Answer

Under rational expectations, people anticipate the effects of economic policies and adjust their behavior accordingly. Thus, an increase in aggregate demand would lead to an immediate adjustment to the new equilibrium at point d, bypassing intermediate points.

Figure 17-3 -Refer to Figure 17-3. Suppose the Economy Is at Point