Figure 15-2
-In Figure 15-2,suppose the economy is at a short run equilibrium at point A and the Bank of Canada announces that the money supply will be increased over the next six months.What point represents the new equilibrium according to the rational expectations theory?

Question

Figure 15-2 
-In Figure 15-2,suppose the economy is at a short run equilibrium at point A and the Bank of Canada announces that the money supply will be increased over the next six months.What point represents the new equilibrium according to the rational expectations theory?

Quizplus · Accepted Answer

According to the rational expectations theory, if the Bank of Canada announces an increase in the money supply, people will anticipate the effects of this policy change. They will expect higher prices in the future and adjust their behavior immediately. This leads to an immediate shift in the aggregate demand curve to the right, moving the economy to a new equilibrium point where the price level is higher, and the output is unchanged in the long run. Point C represents this new equilibrium, where the price level has increased but the output remains the same, consistent with the rational expectations theory.

Figure 15-2 -In Figure 15-2,suppose the Economy Is at a Short Run