Figure 15-3 -As shown in Figure 15-3, if people behave according to adaptive expectations theory, an increase in the aggregate demand curve from AD₁ to AD₂ will cause the economy to move A)directly from E₁ to E₃ and then remain at E₃. B)directly from E₁ to E₂ and then remain at E₂. C)from E₁ to E₂ initially and then eventually move back to E₁. D)from E₁ to E₂ initially and then eventually move to E₃.

Question

Quizplus · Accepted Answer

Under adaptive expectations, people adjust their expectations based on past experiences. Initially, the economy moves from E1 to E2 due to increased demand, but as expectations adjust, it eventually moves to E3.

Figure 15-3 -As Shown in Figure 15-3, If People Behave According to Behave