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Exhibit: Economic Adjustments
-(Exhibit: Economic Adjustments) 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

Use the following to answer questions.
Exhibit: Economic Adjustments 
-(Exhibit: Economic Adjustments) 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 and instantaneous market adjustments, the economy would move directly from point a to point d, as agents anticipate the effects of increased aggregate demand and adjust their behavior accordingly.

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