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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 to the price level and Real GDP level if individuals hold rational expectations, prices and wages are flexible, and individuals correctly anticipate a rise in aggregate demand.

To determine

Effects of correctly anticipated expectation on real GDP and price.

Explanation

In Figure 1, the real GDP is measured on the horizontal axis and price is measured on the vertical axis. If people correctly anticipate a rise in aggregate demand, then the economy will be always at the equilibrium level where the expected price is equal to the actual price. Point 1 shows the initial long-run equilibrium. The monetary authority increases the money supply, and it is correctly identified by the people...

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