Figure 17-3
-In the figure above, suppose we are working under the assumption of the Lucas model. It is the year of the presidential election, and fiscal policy becomes more expansionary. If every firm is convinced that its price increase is being duplicated across the economy, we would picture this as a movement between points
A) A and C.
B) A and B.
C) D and B.
D) D and A.
E) A and D.

Question

Figure 17-3 
-In the figure above, suppose we are working under the assumption of the Lucas model. It is the year of the presidential election, and fiscal policy becomes more expansionary. If every firm is convinced that its price increase is being duplicated across the economy, we would picture this as a movement between points
A) A and C. 
B) A and B. 
C) D and B. 
D) D and A. 
E) A and D.

Quizplus · Accepted Answer

According to the Lucas model, if every firm is convinced that its price increase is being duplicated across the economy, this would lead to an increase in inflation expectations and a shift in the short-run aggregate supply (SRAS) curve to the left, from SRAS1 to SRAS2. This is represented by a movement from point A to point D. However, since fiscal policy is becoming more expansionary, this would shift the aggregate demand (AD) curve to the right, from AD1 to AD2. The intersection of the new SRAS2 and AD2 curves would be at point E, which represents a higher equilibrium price level and a higher level of real GDP than the initial equilibrium at point A. Therefore, the movement would be from point A to point E, passing through point D.

Figure 17-3 -In the Figure Above, Suppose We Are Working Under the Working