Refer to the information provided in Figure 32.3 below to answer the question(s) that follow. Figure 32.3
-Refer to Figure 32.3. Suppose the economy is at Point A. According to the rational expectation theory, an unanticipated increase in money supply
A) leaves the economy at Point A.
B) moves the economy to Point B.
C) moves the economy to Point C.
D) moves the economy to Point D.

Question

Refer to the information provided in Figure 32.3 below to answer the question(s) that follow.  Figure 32.3
-Refer to Figure 32.3. Suppose the economy is at Point A. According to the rational expectation theory, an unanticipated increase in money supply
A) leaves the economy at Point A. 
B) moves the economy to Point B. 
C) moves the economy to Point C. 
D) moves the economy to Point D.

Quizplus · Accepted Answer

According to the rational expectation theory, an unanticipated increase in money supply will lead to an increase in output in the short run, but prices will adjust in the long run, leading to only an increase in prices and no change in the output level. This means the economy will move from Point A to Point B, where there is a higher level of output and prices.

Refer to the Information Provided in Figure 32