-Refer to Exhibit 16-2.Suppose the economy starts out at point A.Next,the public anticipates that the Fed will use expansionary monetary policy to shift the AD curve from AD₁ to AD₂.What happens,instead,is that the Fed does not raise aggregate demand as much as the public expects (bias upward) .Instead the Fed pushes the AD curve from AD₁ to AD₃.As a result,according to new classical theory in the short run the economy moves to point

Question

Quizplus · Accepted Answer

According to new classical theory, if the Fed does not raise aggregate demand as much as expected, the economy will move to a point where actual output is less than expected output, which is represented by point C in this scenario.