(Figure: Aggregate Supply and Demand Shifts) The economy is originally at its long-run equilibrium, SRAS₀ and AD₀. Government policymakers signal that they intend to reduce aggregate demand from AD₀ to AD₁. If we assume that individuals have rational expectations, then the shift from SRAS₀ to SRAS₁ will happen

Question

Quizplus · Accepted Answer

If individuals have rational expectations, they will anticipate the reduction in aggregate demand signaled by the government policymakers, causing a shift in the SRAS curve from SRAS₀ to SRAS₁ almost immediately. This is because they will adjust their production decisions based on their expectations of future demand, leading to a shift in the SRAS curve.

(Figure: Aggregate Supply and Demand Shifts) the Economy Is Originally