If the public believes the government's claim that it will pursue low inflation policies, and the government then turns around and adopts an expansionary policy, then
A)the IA line will shift up before the AD curve shifts right.
B)the IA line will shift up after the AD curve shifts right.
C)the IA line will shift down before the AD curve shifts right.
D)the IA line will shift down after the AD curve shifts right.
E)real GDP will not increase.

Question

Quizplus · Accepted Answer

The IA (Investment-Saving) curve represents the relationship between the interest rate and the level of income or output that is consistent with equilibrium in the market for goods and services. The AD (Aggregate Demand) curve represents the total spending on goods and services in an economy at different price levels. When the government adopts an expansionary policy, it typically increases spending or cuts taxes to stimulate the economy. This leads to an increase in aggregate demand, shifting the AD curve to the right. The increase in demand can lead to higher interest rates as the demand for money increases, which would eventually shift the IA line up. However, the immediate effect of expansionary policy is on aggregate demand, so the AD curve shifts right before the IA line shifts up.

If the Public Believes the Government's Claim That It Will