Figure 17-6
-Refer to Figure 17-6.If firms and workers have adaptive expectations,an expansionary monetary policy will cause the short-run equilibrium to move from

Question

Figure 17-6 
-Refer to Figure 17-6.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, when the central bank implements an expansionary monetary policy, firms and workers adjust their expectations based on past inflation rates. Initially, they may not fully anticipate the inflationary impact of the policy. As a result, real wages may temporarily fall, leading firms to increase hiring and production. This scenario corresponds to a movement along the short-run Phillips curve from a higher unemployment, lower inflation point (A) to a lower unemployment, higher inflation point (B), reflecting the short-term trade-off between inflation and unemployment before expectations adjust.

Figure 17-6 -Refer to Figure 17-6.If Firms and Workers Have Adaptive Expectations,an