Use the following to answer questions.
Exhibit: Economic Adjustments
-(Exhibit: Economic Adjustments) Suppose the economy is at point a. The rational expectations hypothesis suggests that an increase in aggregate demand will result in the economy moving from
A) point a to point d whereas new Keynesian economics suggests that it will move point a to point b.
B) point a to point d whereas new Keynesian economics suggests that it will move point a to point c.
C) point a to point b whereas new Keynesian economics suggests that it will move point a to point d.
D) point a to point c whereas new Keynesian economics suggests that it will move point a to point d.

Question

Use the following to answer questions.
Exhibit: Economic Adjustments 
-(Exhibit: Economic Adjustments) Suppose the economy is at point a. The rational expectations hypothesis suggests that an increase in aggregate demand will result in the economy moving from
A) point a to point d whereas new Keynesian economics suggests that it will move point a to point b. 
B) point a to point d whereas new Keynesian economics suggests that it will move point a to point c. 
C) point a to point b whereas new Keynesian economics suggests that it will move point a to point d. 
D) point a to point c whereas new Keynesian economics suggests that it will move point a to point d.

Quizplus · Accepted Answer

The rational expectations hypothesis suggests that an increase in aggregate demand will lead to an increase in both output and prices, moving the economy from point a to point d. New Keynesian economics, on the other hand, suggests that an increase in aggregate demand will lead to an increase in output but only a small increase in prices, moving the economy from point a to point b.

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