Figure 14.3 -Refer to Figure 14.3.Suppose the Economy Is Initially at Long-Run

Multiple Choice

Figure 14.3

-Refer to Figure 14.3.Suppose the economy is initially at long-run equilibrium and the economy experiences a demand shock such as a stock market crash.The economy then reaches a new,short-run equilibrium point.Assuming expectations are adaptive,this will allow the central bank to decrease the real interest rate,moving the economy to a another new equilibrium point.The stock market crash is temporary,so as the economy works its way back to long-run equilibrium,real GDP will increase.As the expected rate of inflation changes,the economy will move from

A) point A to point C.
B) point D to point C.
C) point A to point D.
D) point B to point C.