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Exhibit: Aggregate Demand Shifts and Expectations
-(Exhibit: Aggregate Demand Shifts and Expectations) Suppose the economy was operating at point e in period 1. Expansionary fiscal and monetary policies adopted in period 1 resulted in a movement to point g in period 3. When workers and firms adjust their expectations in a higher price level and act on these expectations, the economy moves from a
A) expansionary phase to a recovery phase.
B) Phillips phase to a stagflation phase.
C) Phillips phase to a recovery phase.
D) stagflation phase to a recovery phase.

Question

Use the following to answer questions .
Exhibit: Aggregate Demand Shifts and Expectations 
-(Exhibit: Aggregate Demand Shifts and Expectations) Suppose the economy was operating at point e in period 1. Expansionary fiscal and monetary policies adopted in period 1 resulted in a movement to point g in period 3. When workers and firms adjust their expectations in a higher price level and act on these expectations, the economy moves from a
A) expansionary phase to a recovery phase. 
B) Phillips phase to a stagflation phase. 
C) Phillips phase to a recovery phase. 
D) stagflation phase to a recovery phase.

Quizplus · Accepted Answer

When workers and firms adjust their expectations to a higher price level, it can lead to stagflation, characterized by high inflation and stagnant economic growth, moving from a Phillips phase to a stagflation phase.

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