Figure: Aggregate Supply and Demand Shifts (Figure: )The economy is originally at its long-run equilibrium,SRAS₀ and AD₀.Government policymakers signal that they intend to reduce aggregate demand from AD₀ to AD₁.If we assume that individuals have rational expectations,then the speed of the shift from SRAS₀ to SRAS₁ will happen:

Question

Quizplus · Accepted Answer

If individuals have rational expectations, they will anticipate the government's policy to reduce aggregate demand and adjust their behavior accordingly. This means that firms will reduce production and prices will begin to fall almost immediately, causing the SRAS curve to shift leftward toward SRAS₁. Therefore, the speed of the shift from SRAS₀ to SRAS₁ will happen almost immediately.

Figure: Aggregate Supply and Demand Shifts (Figure: )The Economy