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Exhibit: Aggregate Demand Shifts and Expectations
-(Exhibit: Aggregate Demand Shifts and Expectations) Suppose the economy was operating at point e in period 1. Expansionary fiscal and monetary policies adopted in period 1 resulted in a movement to point g in period 3. What happens when workers and firms adjust their expectations in a higher price level and act on these expectations?
A) The aggregate demand curve shifts to the left until it intersects the long-run aggregate supply (LRA
S) curve.
B) The short-run aggregate supply (SRA
S) curve shifts to the right.
C) The SRAS curve shifts to the left.
D) Both the LRAS and the SRAS curves shift to the right.

Question

Use the following to answer questions .
Exhibit: Aggregate Demand Shifts and Expectations 
-(Exhibit: Aggregate Demand Shifts and Expectations) Suppose the economy was operating at point e in period 1. Expansionary fiscal and monetary policies adopted in period 1 resulted in a movement to point g in period 3. What happens when workers and firms adjust their expectations in a higher price level and act on these expectations?
A) The aggregate demand curve shifts to the left until it intersects the long-run aggregate supply (LRA
S) curve. 
B) The short-run aggregate supply (SRA
S) curve shifts to the right. 
C) The SRAS curve shifts to the left. 
D) Both the LRAS and the SRAS curves shift to the right.

Quizplus · Accepted Answer

When workers and firms adjust their expectations in a higher price level and act on these expectations, the short-run aggregate supply (SRAS) curve shifts to the left, resulting in a new equilibrium point where the aggregate demand curve intersects the SRAS curve at a higher price level and a lower level of output than before.

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