The figure given below represents the new classical long run and short run Phillips curve measuring inflation rate on vertical axis and unemployment rate on horizontal axis.
Figure 15.2

-Refer to Figure 15.2. Assume that the government adopted an unexpected expansionary monetary policy that has the economy currently at point D. If people expect that this inflation rate will persist next year, the economy will now:
A) move to point A.
B) move to point B.
C) move to point C.
D) move to point E.
E) remain at point D.

Question

The figure given below represents the new classical long run and short run Phillips curve measuring inflation rate on vertical axis and unemployment rate on horizontal axis.
Figure 15.2
 
-Refer to Figure 15.2. Assume that the government adopted an unexpected expansionary monetary policy that has the economy currently at point D. If people expect that this inflation rate will persist next year, the economy will now:
A) move to point A. 
B) move to point B. 
C) move to point C. 
D) move to point E. 
E) remain at point D.

Quizplus · Accepted Answer

The unexpected expansionary monetary policy will shift the aggregate demand curve to the right, leading to an increase in output and a higher price level. If people expect that this inflation rate will persist next year, the short-run aggregate supply curve will shift to the left, leading to a movement along the new aggregate demand curve to a point where the expected inflation rate is equal to the actual inflation rate. This point is point A.

The Figure Given Below Represents the New Classical Long Run