Figure 15-3

-As shown in Figure 15-3,if people behave according to adaptive expectations theory,an increase in the aggregate demand curve from AD₁ to AD₂ will cause

Question

Figure 15-3
 
-As shown in Figure 15-3,if people behave according to adaptive expectations theory,an increase in the aggregate demand curve from AD₁ to AD₂ will cause

Quizplus · Accepted Answer

Adaptive expectations theory suggests that people adjust their expectations of future prices based on past experience, and thus, an increase in aggregate demand from AD₁ to AD₂ will lead to labor adjusting nominal wages sluggishly (option A), causing the aggregate supply curve to shift from SRAS₁ to SRAS₂ (option B), and eventually causing the price level to rise from 100 to 110 (option C). Therefore, all of the above options are correct, making option D the best choice.

Figure 15-3 -As Shown in Figure 15-3,if People Behave According to Adaptive