Refer to the information provided in Figure 18.1 below to answer the questions that follow. Figure 18.1 -Refer to Figure 18.1.According to the new classical economists,under rational expectations an expected decrease in taxes would A)shift AS₁ to the right. B)shift AD₁ to the right. C)shift AD₁ to the left. D)not change AD or AS.

Question

Quizplus · Accepted Answer

Under rational expectations, individuals anticipate the effects of fiscal policy changes, such as a decrease in taxes, and adjust their behavior accordingly. Therefore, the expected decrease in taxes would not change aggregate demand (AD) or aggregate supply (AS) as people would save the tax cut expecting future tax increases to offset it.

Refer to the Information Provided in Figure 18