-In the above figure, the economy is initially at point A. If workers and firms correctly anticipate the increase in aggregate demand and the resulting inflation rate, the economy will move to point
A) A, that is, the price level and level of real GDP will not change.
B) B.
C) C.
D) D.

Question

-In the above figure, the economy is initially at point A. If workers and firms correctly anticipate the increase in aggregate demand and the resulting inflation rate, the economy will move to point
A) A, that is, the price level and level of real GDP will not change. 
B) B. 
C) C. 
D) D.

Quizplus · Accepted Answer

When workers and firms correctly anticipate an increase in aggregate demand and the resulting inflation, they adjust their expectations and actions accordingly. This means that nominal wages and prices adjust to the anticipated inflation, allowing the economy to move to a new equilibrium at a higher price level without changing the level of real GDP. This is represented by a vertical long-run aggregate supply curve, indicating that the economy moves to a point like C, where the price level is higher but real GDP remains at its potential level.

-In the Above Figure, the Economy Is Initially at Point