Figure 11-6

-Refer to Figure 11-6.Suppose the economy is operating at "a".Some people observe that an expansionary monetary policy will increase the money supply and ultimately drive the price level to the equilibrium at _______.They rationally adjust their behavior, bypassing ________.

Question

Figure 11-6
 
-Refer to Figure 11-6.Suppose the economy is operating at "a".Some people observe that an expansionary monetary policy will increase the money supply and ultimately drive the price level to the equilibrium at _______.They rationally adjust their behavior, bypassing ________.

Quizplus · Accepted Answer

If the economy is operating at point "a" and an expansionary monetary policy is implemented, it will increase the money supply and shift the aggregate demand curve to the right. This will cause the price level to increase and the short-run equilibrium point will move from "a" to either "b" or "c", depending on the slope of the short-run aggregate supply curve. 
However, if people rationally adjust their behavior and anticipate the increase in the price level, they will increase their demand for goods and services, causing the aggregate demand curve to shift even further to the right. This will ultimately drive the price level to the equilibrium at point "d", which is the long-run equilibrium point. Therefore, the best choice is B, as the people will bypass the short-run equilibrium at "b" and reach the long-run equilibrium at "d".

Figure 11-6 -Refer to Figure 11-6.Suppose the Economy Is Operating at "A".Some