Figure 15-3 As shown in Figure 15-3, if people behave according to rational expectations theory, an increase in the aggregate demand curve from AD₁ to AD₂ will cause the price level to move A) directly from 100 to 105 and then remain at 105. B) directly from 100 to 110 and then remain at 110. C) from 100 to 105 initially and then eventually move back to 100. D) from 100 to 105 initially and then eventually move to 110.

Question

Quizplus · Accepted Answer

According to rational expectations theory, people will expect prices to rise when aggregate demand increases. As a result, firms will increase prices in anticipation of higher demand. Therefore, the price level will move directly from 100 to 110 and then remain at 110. This is consistent with the vertical long-run aggregate supply curve.

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