Figure 15-3 As shown in Figure 15-3, if people behave according to adaptive expectations theory, an increase in the aggregate demand curve from AD₁ to AD₂ will cause A) labor to adjust nominal wages sluggishly. B) the aggregate supply curve to shift from SRAS₁ to SRAS₂ C) the price level to eventually rise from 100 to 110. D) All of the above.

Question

Quizplus · Accepted Answer

According to adaptive expectations theory, people adjust their expectations of prices based on past prices, leading to slow adjustment of nominal wages. This means that labor will adjust wages sluggishly in response to an increase in demand. This sluggish adjustment of wages will cause the short-run aggregate supply curve to shift from SRA₁ to SRA₂. As a result, the price level will eventually rise from 100 to 110. Therefore, all of the above options are correct.

Figure 15-3 as Shown in Figure 15-3, If People