The combination of the Keynes,Pigou,expectations,and redistribution effects results in an economy that self-corrects given a sufficiently low price level,when the four effects give rise to an AD curve that is
A)vertical.
B)downward-sloping and that stays to the left of LAS.
C)downward-sloping and that intersects LAS.
D)downward-sloping and that stays to the right of LAS.

Question

Quizplus · Accepted Answer

The combination of the four effects results in an AD curve that is downward-sloping and intersects LAS. This is because the Keynes and Pigou effects lead to a negatively sloped AD curve, while the expectations effect and redistribution effect can shift the AD curve. However, when the price level is sufficiently low, the Keynes and Pigou effects dominate and the AD curve intersects LAS. At this point, the economy is in equilibrium and there are no further incentives for firms or consumers to change their behavior, resulting in self-correction.

The Combination of the Keynes,Pigou,expectations,and Redistribution Effects Results in an Economy