Refer to the graph above. Assume that the economy is in initial equilibrium where AD₁ intersects AS₁. If there is an anticipated decrease in aggregate demand to AD₂, then according to rational expectations theory, the path for adjustment runs from point: A) A to B to C B) A to D to C C) A directly to C D) A directly to D

Question

Quizplus · Accepted Answer

According to rational expectations theory, agents in the economy will anticipate the decrease in aggregate demand and adjust their behavior accordingly. This means that the economy will move directly from point A to point C, where the new equilibrium is reached at the intersection of AS₂ and AD₂. The other paths (choices A, B, and D) involve unnecessary movements away from the new equilibrium point.

Refer to the Graph Above