Figure 17-3

-After a shift from AD0 to AD1, which of the following patterns of adjustment is consistent with the "Price Fooling" model?
A) A to B to E
B) A to F to E
C) A to C to E
D) A to C to A

Question

Figure 17-3

-After a shift from AD0 to AD1, which of the following patterns of adjustment is consistent with the "Price Fooling" model?
A) A to B to E 
B) A to F to E 
C) A to C to E 
D) A to C to A

Quizplus · Accepted Answer

According to the "Price Fooling" model, after a shift from AD0 to AD1, the short-run equilibrium point will move from point A to point C, as output and price both increase. However, the increase in output is only temporary and firms will soon realize that they cannot sustain the higher production levels due to higher input costs. As a result, they will reduce production, causing output to decrease and price to increase further (from point C to E). This adjustment pattern is consistent with choice C.

Figure 17-3 -After a Shift from AD0 to AD1, Which of the AD1