Figure 17-3

-After a shift from AD0 to AD1, which of the following patterns of adjustment is consistent with the Lucas 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 Lucas 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 Lucas model, the short-run Phillips curve is initially stable but shifts up or down depending on expected inflation. In this scenario, a shift from AD0 to AD1 indicates an increase in aggregate demand. This causes an increase in output and employment in the short run, leading to a lower unemployment rate and inflation expectations to adjust upward. The new equilibrium is at point C. In the long run, prices fully adjust to the increase in aggregate demand, shifting the short-run Phillips curve up to the original long-run Phillips curve. The new equilibrium is at point E. Therefore, the consistent pattern of adjustment is A to C to E.

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