Refer to the graph above. Assume that the economy is in initial equilibrium where AD₁ intersects AS₁. If there is an anticipated increase in aggregate demand to AD₂, then according to the rational expectations economists, the path for adjustment runs from point: A) A to B to C B) A to D to C C) A directly to C D) A directly to B

Question

Quizplus · Accepted Answer

According to rational expectations economists, agents in the economy will anticipate the increase in aggregate demand and adjust their expectations accordingly. This means that there will be an immediate shift in the short-run aggregate supply curve to the left, to AS₂, which intersects the initial aggregate demand curve at point C. Therefore, the adjustment path runs directly from point A to point C. Points B and D are not relevant in this case.

Refer to the Graph Above