After a shift from AD₀ to AD₁,which of the following patterns of adjustment is consistent with the Lucas model?
A)A to B to E
B)A to F to E
C)A to C to E
D)A to C to A

Question

Quizplus · Accepted Answer

According to the Lucas model, there will be a period of adjustment before the economy returns to a long-run equilibrium. Choice C shows the initial shift from AD₀ to AD₁ (point A to point C), followed by a period of adjustment where output and prices adjust and shift the economy to point E. Finally, the economy returns to its long-run equilibrium at point A. This pattern of adjustment is consistent with the Lucas model. Choices A, B, and D do not show the adjustment process to long-run equilibrium.

After a Shift from AD₀ to AD₁,which of the Following