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 government spending would
A)shift AS1 to the right.
B)shift AD1 to the right.
C)shift AD1 to the left.
D)not change AD and AS.

Question

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 government spending would
A)shift AS1 to the right. 
B)shift AD1 to the right. 
C)shift AD1 to the left. 
D)not change AD and AS.

Quizplus · Accepted Answer

According to the new classical economists, under rational expectations, individuals will anticipate any changes in government spending and adjust their behavior accordingly. Therefore, if they expect a decrease in government spending, they will decrease their demand for goods and services, leading to a shift in the AD curve to the left. However, at the same time, firms will adjust their production levels and prices to maintain their profits, leading to a shift in the AS curve to the right. The net effect on the equilibrium output and price level would be ambiguous, so AD and AS curves would not change.

Refer to the Information Provided in Figure 18