The figure given below depicts the equilibrium level of real GDP and the price level in an economy, derived from the aggregate demand aggregate supply model.
Figure 14.3

-Refer to Figure 14.3. Consider that the economy initially operates at point A. Therefore, according to the theory of rational expectations, an unanticipated increase in consumer confidence will cause the economy to move along the path:

Question

The figure given below depicts the equilibrium level of real GDP and the price level in an economy, derived from the aggregate demand aggregate supply model.
Figure 14.3
 
-Refer to Figure 14.3. Consider that the economy initially operates at point A. Therefore, according to the theory of rational expectations, an unanticipated increase in consumer confidence will cause the economy to move along the path:

Quizplus · Accepted Answer

An unanticipated increase in consumer confidence will shift the aggregate demand curve to the right, from AD to AD'. This will cause the economy to move from point A to point B, along the short-run aggregate supply curve (SRAS). As output increases, firms may start to face higher costs as they start using more inputs, and this will cause the SRAS to shift upwards to SRAS'. The final equilibrium will be at point C, with higher output and higher prices. Therefore, the economy will move along the path ABC.

The Figure Given Below Depicts the Equilibrium Level of Real