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

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.

Quizplus · Accepted Answer

According to the new classical economists, under rational expectations, individuals adjust their expectations of future variables based on all available information. Therefore, an expected decrease in taxes would already be factored into their decisions and would not cause a shift in aggregate demand (AD) or aggregate supply (AS) curves. Therefore, the correct answer is D - not change AD or AS.

Refer to the Information Provided in Figure 18