Figure 14.4

-Refer to Figure 14.4. Suppose the economy is operating at point A, but the government increases spending because it believes that 6 percent unemployment is unacceptably high. If the adaptive expectations hypothesis holds, in the short run, the economy will move to:

Question

Figure 14.4
 
-Refer to Figure 14.4. Suppose the economy is operating at point A, but the government increases spending because it believes that 6 percent unemployment is unacceptably high. If the adaptive expectations hypothesis holds, in the short run, the economy will move to:

Quizplus · Accepted Answer

Under adaptive expectations, people adjust their expectations based on past experiences. An increase in government spending will initially boost demand, moving the economy from point A to point B in the short run, as output increases and unemployment decreases.

Figure 14.4 -Refer to Figure 14.4. Suppose the Economy Is Operating at Economy