-Refer to the above figure. The rational expectations hypothesis implies that an anticipated increase in aggregate demand from AD1 to AD2 will

Question

Quizplus · Accepted Answer

The rational expectations hypothesis suggests that if an increase in aggregate demand (from AD1 to AD2) is fully anticipated, producers will adjust their prices in advance. Therefore, the economy moves directly from point a to point b, with an increase in the price level but no change in output, as the economy is already at its full employment output.

-Refer to the Above Figure