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:

Wages

Payments made to workers for their labor, usually based on hours worked or output produced, and a fundamental component of employment contracts.

Equilibrium Wage

The wage rate at which the quantity of labor demanded by employers equals the quantity of labor supplied by workers, resulting in labor market equilibrium.

Labor

Human mental and physical contributions employed in the manufacturing of goods and services.

Marginal Product

The extra production obtained when one additional unit of a specific input is used, while all other inputs stay unchanged.