Refer to the figure and assume the economy initially is in equilibrium at point
ID: 1160582 • Letter: R
Question
Refer to the figure and assume the economy initially is in equilibrium at point a. In the new classical theory, a fully anticipated increase in aggregate demand from AD2 to AD1 would move the economy
directly from a to d.
from a to b to d.
from a to e to d.
directly from a to f.
2.
Refer to the graph. Assume that the economy is in initial equilibrium where AD1 intersects AS1. If there is an unanticipated increase in aggregate demand, then according to new classical economics, the economy will self-correct with a
A. shift from AD2 to AD1.
B. shift from AS1 to AS2.
C. movement from point B to point A.
D. movement from point A to point B.
3.
Rational expectations theory allows for temporary changes in output due to expansionary policy, whereas adaptive expectations theory holds that no such changes in output could occur.
True
False
A.directly from a to d.
B.from a to b to d.
C.from a to e to d.
D.directly from a to f.
AS1 AS2 AS3 ASLR 1 AD2 AD3 0 Real GDPExplanation / Answer
1. Refer to the figure and assume the economy initially is in equilibrium at point a. In the new classical theory, a fully anticipated increase in aggregate demand from AD2 to AD1 would move the economy
Correct ans is a) directly from a to d.
Explaination : It is so because when the economy already anticipate the increase in the agreegate demand it will not an effective policy so the output will not rise and this anticipated increase in aggregate demand will lead to increase in the Prices only, the economy will move from point directly from a to d because this is fully anticipated increase in AD. So real output will be at same level and prices will rise.
2.Refer to the graph. Assume that the economy is in initial equilibrium where AD1 intersects AS1. If there is an unanticipated increase in aggregate demand, then according to new classical economics, the economy will self-correct with a
Correct ans is B shift from AS1 to AS2.
Explaination : It is so because the change is unanticipated so when there is unanticipated increase in AD, economy will self correct with a by decrease in short run supply curve and the output will return to the same level but at the higher price P3. The Short run supply curve will shift from AS1 to AS2. The immediate impact of the unanticipated increase in the AD will lead to increase the ouput to Q2, but the economy soon anticipate this increase in AD and the AS curve will shift backward which wlll automatically correct the economy.
3. True : Rational exepectations theory says that when there is expansionary policy the changes is temporary because people will soon anticipate the effect of the policy and the nominal wages and prices will rise which again lead to fall the output to the same level. While adaptive expectation theory hold no temporary changes in output as they will think that present is same as future so the increase in ouptut is not temporary.