Refer to the graph. Assume that the economy is in initial equilibrium where AD $A D _ { 1 }$ intersects A
$A S _ { 1 }$ . If
There is an unanticipated increase in aggregate demand and the economy self-corrects, then the
Adaptive-expectations adjustment path would go from point
A) A directly to B.
B) A to B to C.
C) B to A to D.
D) A to B to C to D.

Question

Refer to the graph. Assume that the economy is in initial equilibrium where AD $A D _ { 1 }$ intersects A
$A S _ { 1 }$ . If
There is an unanticipated increase in aggregate demand and the economy self-corrects, then the
Adaptive-expectations adjustment path would go from point
A) A directly to B. 
B) A to B to C. 
C) B to A to D. 
D) A to B to C to D.

Quizplus · Accepted Answer

The graph shows a situation where the initial equilibrium is at point A where AD1 intersects AS1. If there is an unanticipated increase in aggregate demand, it will cause an initial increase in both equilibrium output (Y1 to Y2) and price level (P1 to P2), resulting in a short-run expansion of output.

As the economy self-corrects, the price level will start to rise, causing workers to demand higher wages, which shifts the AS curve leftward. This shift will continue until equilibrium is restored at point C where the AD2 intersects the AS2.

The adaptive-expectations adjustment path in this scenario would be from point A to B to C as the economy adjusts to the new equilibrium. Point B represents the temporary increase in output in the short run before the adjustment process begins. Therefore, the correct answer is B.

Refer to the Graph AD1A D _ { 1 }AD1​ Intersects A

Refer to the Graph $A D _ { 1 }$ Intersects A