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

Quizplus · Accepted Answer

According to rational expectations theory, individuals and firms will adjust their expectations and actions immediately in response to the announcement of a decrease in the money supply. This leads to a new equilibrium at point A, where the economy adjusts to the anticipated effects of the policy change.

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