Refer to the graph. Assume the economy is at the initial position of $B _ { 2 }$ . An increase in aggregate
Demand with a corresponding adjustment in in?ation expectations and wages will tend to
A) move the economy to point $B _ { 3 }$
B) move the economy to point $C _ { 2 }$
C) move the economy to point $C _ { 1 } .$
D) have no effect in shifting the economy from point $B _ { 2 }$

Question

Refer to the graph. Assume the economy is at the initial position of $B _ { 2 }$ . An increase in aggregate
Demand with a corresponding adjustment in in?ation expectations and wages will tend to
A) move the economy to point $B _ { 3 }$ 
B) move the economy to point $C _ { 2 }$ 
C) move the economy to point $C _ { 1 } .$ 
D) have no effect in shifting the economy from point $B _ { 2 }$

Quizplus · Accepted Answer

An increase in aggregate demand will lead to an increase in output and prices. This increase in prices will lead to an adjustment in inflation expectations and wages, which will increase the short-run aggregate supply. This shift will move the economy from point B2 to B3, where output is higher and prices are slightly higher than at B2. Option B is incorrect because moving to point C2 would require a decrease in aggregate demand, which is the opposite of what is stated in the question. Option C is incorrect because it suggests a contractionary policy, which is not mentioned in the question. Option D is incorrect because an increase in aggregate demand will always shift the economy from its initial point.

Refer to the Graph B2B _ { 2 }B2​ an Increase in Aggregate Demand with a Corresponding Adjustment

Refer to the Graph $B _ { 2 }$ an Increase in Aggregate
Demand with a Corresponding Adjustment