Refer to the graph. Assume that the economy is in initial equilibrium where AD $A D _ { 1 }$ intersects A
$A S _ {1 }$ . If
There is an anticipated increase in aggregate demand to AD
$A D _ { 2 }$ , then, according to the rational
Expectations economists, the path for adjustment runs from point
A) A to B to C.
B) A to D to C.
C) A directly to C.
D) A directly to B.

Question

Refer to the graph. Assume that the economy is in initial equilibrium where AD $A D _ { 1 }$ intersects A
$A S _ {1 }$ . If
There is an anticipated increase in aggregate demand to AD
$A D _ { 2 }$ , then, according to the rational
Expectations economists, the path for adjustment runs from point
A) A to B to C. 
B) A to D to C. 
C) A directly to C. 
D) A directly to B.

Quizplus · Accepted Answer

According to rational expectations economists, the economy will adjust to the new equilibrium point directly without going through any intermediate points. Therefore, the correct path of adjustment is from point A directly to point C when there is an anticipated increase in aggregate demand.

Refer to the Graph AD1A D _ { 1 }AD1​ Intersects A

Refer to the Graph $A D _ { 1 }$ Intersects A