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Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383

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BuyFindarrow_forward

Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383
Textbook Problem

Illustrate graphically what would happen in the short run and in the long run to the price level and Real GDP if individuals hold rational expectations, prices and wages are flexible, and individuals overestimate the rise in aggregate demand (bias upward).

To determine

Effects of over estimation in the short run and long run.

Explanation

In Figure 1, the real GDP is measured on the horizontal axis and price level is measured on the vertical axis. Suppose people overestimate that the aggregate demand curve shifts from AD1 to AD3, then the expected price becomes 118, which is greater than the actual price...

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