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Exhibit: Monetary Policy and Rational Expectations
-(Exhibit: Monetary Policy and Rational Expectations) 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
A) d. They rationally adjust their behavior and the aggregate demand curve shifts to the left and d becomes the new equilibrium point.
B) b. They rationally adjust their behavior and the aggregate demand curve shifts to the left and b becomes the new equilibrium point.
C) d. They rationally adjust their behavior and the short-run aggregate supply curve shifts to the left and d becomes the new equilibrium point.
D) c. They rationally adjust their behavior and the short-run aggregate supply curve shifts to the left and d becomes the new equilibrium point.

Question

Use the following to answer questions .
Exhibit: Monetary Policy and Rational Expectations 
-(Exhibit: Monetary Policy and Rational Expectations) 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
A) d. They rationally adjust their behavior and the aggregate demand curve shifts to the left and d becomes the new equilibrium point. 
B) b. They rationally adjust their behavior and the aggregate demand curve shifts to the left and b becomes the new equilibrium point. 
C) d. They rationally adjust their behavior and the short-run aggregate supply curve shifts to the left and d becomes the new equilibrium point. 
D) c. They rationally adjust their behavior and the short-run aggregate supply curve shifts to the left and d becomes the new equilibrium point.

Quizplus · Accepted Answer

Rational expectations suggest that people anticipate the effects of monetary policy. If they expect higher prices, they may demand higher wages, shifting the short-run aggregate supply curve to the left, leading to a new equilibrium at point d.

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