Figure 11-6
-Refer to Figure 11-6. Suppose the economy is operating at point a. Some people observe that an expansionary monetary policy will increase the money supply and ultimately drive the price level to the equilibrium at

Question

Figure 11-6 
-Refer to Figure 11-6. Suppose the economy is operating at point a. Some people observe that an expansionary monetary policy will increase the money supply and ultimately drive the price level to the equilibrium at

Quizplus · Accepted Answer

Those who observe an expansionary monetary policy and expect the price level to ultimately reach the equilibrium at d will adjust their behavior accordingly, bypassing the short-run equilibrium at b. This is because rational people will not want to be caught holding onto money that will be worth less in the future due to inflation. As a result, they will spend more and drive up prices in the short run until the new equilibrium at d is reached.

Figure 11-6 -Refer to Figure 11-6. Suppose the Economy Is Operating at Is