Figure 16-6
-Refer to Figure 16-6. Suppose the economy was operating at point e in period 1. Expansionary fiscal and monetary policies adopted in period 1 resulted in a movement to point g in period 3. What happens when workers and firms adjust their expectations in a higher price level and act on these expectations?

Question

Figure 16-6 
-Refer to Figure 16-6. Suppose the economy was operating at point e in period 1. Expansionary fiscal and monetary policies adopted in period 1 resulted in a movement to point g in period 3. What happens when workers and firms adjust their expectations in a higher price level and act on these expectations?

Quizplus · Accepted Answer

When workers and firms adjust their expectations to a higher price level, they will increase their prices and wages, causing the SRAS curve to shift to the left. This will result in a new short-run equilibrium at point f, with a higher price level and lower real GDP. Since the economy is initially at a point above potential GDP, this adjustment is necessary to bring the economy back to its long-run equilibrium. Therefore, the correct answer is C, the SRAS curve shifts to the left.

Figure 16-6 -Refer to Figure 16-6. Suppose the Economy Was Operating at Was