Exhibit 16-2

-Refer to Exhibit 16-2.Suppose the economy starts at point B.Fed monetary policy shifts the AD curve to AD₁.A recession is likely if the economy operates under __________ assumptions,which include wage and price __________.

Question

Exhibit 16-2
Exhibit 16-2 -Refer to Exhibit 16-2.Suppose the economy starts at point B.Fed monetary policy shifts the AD curve to AD<sub>1</sub>.A recession is likely if the economy operates under __________ assumptions,which include wage and price __________. A) new classical; flexibility B) new classical; inflexibilities C) new Keynesian; flexibility D) new Keynesian; inflexibilities

Exhibit 16-2 -Refer to Exhibit 16-2.Suppose the economy starts at point B.Fed monetary policy shifts the AD curve to AD<sub>1</sub>.A recession is likely if the economy operates under __________ assumptions,which include wage and price __________. A) new classical; flexibility B) new classical; inflexibilities C) new Keynesian; flexibility D) new Keynesian; inflexibilities

-Refer to Exhibit 16-2.Suppose the economy starts at point B.Fed monetary policy shifts the AD curve to AD₁.A recession is likely if the economy operates under __________ assumptions,which include wage and price __________.

Quizplus · Accepted Answer

The AD curve shift indicates a shift in aggregate demand due to Fed monetary policy. The fact that a recession is likely suggests that the economy is operating below potential output. New Keynesian assumptions include inflexibilities in wages and prices which can explain why the economy is not adjusting quickly to the shift in aggregate demand, leading to a recession. Thus, the best choice is D.

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