Figure 17-3

-In Figure 17-3 above,suppose we are working under the assumption of the Lucas model.Suddenly,monetary policy becomes more expansionary and every firm believes that the higher prices bid on their product is not being enjoyed by any other firm.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 Figure 17-3 above,suppose we are working under the assumption of the Lucas model.Suddenly,monetary policy becomes more expansionary and every firm believes that the higher prices bid on their product is not being enjoyed by any other firm.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

The Lucas model assumes that firms are forward-looking and take into account the effects of monetary policy on the overall price level. Therefore, when monetary policy becomes more expansionary, firms will expect the overall price level to rise and will adjust their prices accordingly. This will lead to a movement along the aggregate supply curve from point A to point C.

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