Textbook Problem

Suppose the economy in Exhibit 10 is at point E₁, and the Fed increases the money supply. If people have rational expectations, then the economy will move

1. a. to point A in the short run and point B in the long run.
2. b. directly to point B.
3. c. to point C in the short run and point D in the long run.
4. d. directly to point D.