Refer to the Diagram

question 22

Multiple Choice

Refer to the diagram. Rational expectations theory says that a fully anticipated shift in aggregate demand from AD₁ to AD₂ will

• A) move the economy from a to b to c.
• B) move the economy directly from a to c.
• C) move the economy from a to a new equilibrium at b.
• D) shift the AS curve to the right.

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Definitions:

Irrational

Acting without reason or understanding, often defying logical or expected behavior, particularly in economic contexts referring to market participants.

Weak-form Efficient

A form of market efficiency that asserts all past trading information is fully reflected in stock prices, and thus, technical analysis cannot consistently produce excess returns.

Behavioral Patterns

Regularities in the behavior of individuals or groups, often studied in psychology and economics to predict responses to stimuli or decisions.

Arbitrage Activity

The practice of buying and selling equivalent assets in different markets to exploit price discrepancies for a risk-free profit.