Exhibit 16-2

-Refer to Exhibit 16-2.Suppose the economy starts out at point A.Next,the public anticipates that the Fed will use expansionary monetary policy to shift the AD curve from AD₁ to AD₂.What happens,instead,is that the Fed does not raise aggregate demand as much as the public expects (bias upward) . Instead the Fed pushes the AD curve from AD₁ to AD₃.As a result,according to new classical theory in the short run the economy moves to point

Question

Exhibit 16-2

-Refer to Exhibit 16-2.Suppose the economy starts out at point A.Next,the public anticipates that the Fed will use expansionary monetary policy to shift the AD curve from AD₁ to AD₂.What happens,instead,is that the Fed does not raise aggregate demand as much as the public expects (bias upward) . Instead the Fed pushes the AD curve from AD₁ to AD₃.As a result,according to new classical theory in the short run the economy moves to point

Quizplus · Accepted Answer

According to new classical theory, if the public expects a certain level of expansionary policy and the actual policy is less than expected, the economy will move to a point where output is lower than expected but prices are higher. This corresponds to point C, where the AD curve shifts to AD3 instead of the expected AD2.

Exhibit 16-2 -Refer to Exhibit 16-2.Suppose the Economy Starts Out at Point