Suppose the economy is initially in equilibrium where real GDP equals potential GDP and the inflation rate is at the target rate.Other things equal,a housing boom will cause aggregate expenditures to increase,which will result in a new,short-run equilibrium.To return GDP to its potential level,the inflation rate will adjust.With adaptive expectations,this will result in
A) an increase in aggregate demand and an increase in the inflation rate.
B) a decrease in aggregate supply and an increase in the inflation rate.
C) a decrease in aggregate demand and a decrease in the inflation rate.
D) an increase in aggregate supply and a decrease in the inflation rate.

Question

Quizplus · Accepted Answer

A housing boom increases aggregate expenditures, leading to higher demand and inflation. With adaptive expectations, inflation expectations adjust upwards, causing a decrease in aggregate supply as firms face higher costs, further increasing the inflation rate.

Suppose the Economy Is Initially in Equilibrium Where Real GDP