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Figure: Understanding Expectation Theories
-(Figure: Understanding Expectation Theories)Assume the economy is at point c.According to the theory of adaptive expectations,if the Fed announces and then implements a contractionary policy,the economy will move from point c:

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Use the following to answer questions 
Figure: Understanding Expectation Theories 
-(Figure: Understanding Expectation Theories)Assume the economy is at point c.According to the theory of adaptive expectations,if the Fed announces and then implements a contractionary policy,the economy will move from point c:

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According to the theory of adaptive expectations, individuals expect future outcomes based on past experiences. Therefore, if the Fed announces and implements a contractionary policy, individuals will anticipate higher interest rates and lower output in the future. This will cause a decrease in current consumption and investment demand, leading to a shift in the aggregate demand curve to the left. As a result, the economy will move from point c to point b in the short run. Over time, as individuals adjust their expectations and behavior, the economy will move towards the long-run equilibrium at point d, where the aggregate supply curve intersects the new aggregate demand curve.

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