Exhibit 16-2 -Refer to Exhibit 16-2.Suppose the Economy Starts Out at Point

Multiple Choice

Exhibit 16-2

-Refer to Exhibit 16-2.Suppose the economy starts out at point A.Next,the public anticipates that the Fed will use expansionary monetary policy to shift the AD curve from AD₁ to AD₂.What happens,instead,is that the Fed does not raise aggregate demand as much as the public expects (bias upward) . Instead the Fed pushes the AD curve from AD₁ to AD₃.As a result,according to new classical theory in the long run point _____________ best represents the new state of the economy.

A) A
B) B
C) C
D) D
E) E