Figure 28-3

-Refer to Figure 28-3.If firms and workers have adaptive expectations,an expansionary monetary policy will cause the short-run equilibrium to move from

Question

Figure 28-3
 
-Refer to Figure 28-3.If firms and workers have adaptive expectations,an expansionary monetary policy will cause the short-run equilibrium to move from

Quizplus · Accepted Answer

With adaptive expectations, firms and workers adjust their expectations gradually over time based on past experience. In the short run, an expansionary monetary policy will shift the AD curve to the right, causing output and prices to increase. This will lead to firms increasing production and employment, and workers demanding higher wages. However, over time, workers will see that prices are rising faster than expected, and they will demand even higher wages to compensate. This will shift the SRAS curve to the left, causing output to return to its original level (point A), but at a higher price level (point B). Therefore, the short-run equilibrium will move from point A to point B.

Figure 28-3 -Refer to Figure 28-3.If Firms and Workers Have Adaptive Expectations,an