Economists disagree about how quickly the economy adjusts to an aggregate demand

Question

Economists disagree about how quickly the economy adjusts to an aggregate demand shock. In the view of some economists, people form expectations based on present realities and change expectations gradually as their experience unfolds. Such expectations are said to be The following graph shows the aggregate demand curve (AD), the short-run aggregate supply (SRAS), and the long-run aggregate supply curve (LRAS) for a hypothetical economy that is initially in equilibrium, operating at potential output at point N 110 SRAS 106 102 ; 94 40 48 52 QUANTITY OF OUTPUT (Trillions of dollars) Suppose an unanticipated decrease in investment spending causes the aggregate demand curve to shift to the left (from AD, to AD.). According to adherents of the adaptive-expectations theory, the unanticipated change in aggregate demand will cause the economy to move in which direction? From point N to point D and, eventually, from point D to point Z O From point N to point D, before returning to point N O Directly from point N to point Z From point N to point K, before returning to point N

Explanation / Answer

1) adaptive in nature

2) (B) as aggregate demand will shift the AD1 to AD2 then supply would increase to due reason price will decrease but adaptive measures would push it back to point N Again.

2) (B) initially AD1 move to AD2 point N move to D but due to adaptive policy measure would ask them to demand less wages this would increase the supply for SRAS1 to SRAS2 so price will move from 102 to 98.

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.