Exhibit 16.4

-Refer to Exhibit 16.4. If the Fed announces it plans to keep prices stable at P' but workers and firms, expect monetary policy to be expansionary, then their expectations are depicted by the short-run aggregate supply curve SRAS at a price level ____
A) P.
B) P'.
C) P".
D) between 0 and P'.
E) between P' and P.

Question

Exhibit 16.4
 
-Refer to Exhibit 16.4. If the Fed announces it plans to keep prices stable at P' but workers and firms, expect monetary policy to be expansionary, then their expectations are depicted by the short-run aggregate supply curve SRAS at a price level ____
A) P. 
B) P'. 
C) P". 
D) between 0 and P'. 
E) between P' and P.

Quizplus · Accepted Answer

If the workers and firms expect monetary policy to be expansionary, then they will anticipate an increase in aggregate demand, which will lead to higher prices. Therefore, the short-run aggregate supply curve will shift to the left from SRAS to SRAS'. The new equilibrium will occur at a higher price level than before, at P". Therefore, the correct answer is C.

Exhibit 16.4 -Refer to Exhibit 16.4. If the Fed Announces It Plans