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a ng.cengage.com MindTap - Cengage Learning CENGAGE I MINDTAP Homework: Expectations Theory and the Economy (Ch 16) Q Search this course Attempts 3. Expectations theories Average / 1 Consider an economy currently in long-run equilibrium at an aggregate real output of $5 trillion and a Real GDP of 80. Suppose the government wishes to further raise Real GDP by implementing a series of expansionary fiscal and monetary policies. The following graphs represent two possible paths that the economy may follow in response to the actions taken by the government. Each graph shows the economy's long-run aggregate supply curve (IRAS), its initial aggregate demand curve (labeled ADI ), its aggregate demand curve after fiscal and monetary expansion (labeled AD2 its initial short-run aggregate supply curve (labeled SRASI), and its short-run aggregate supply curve after workers have responded to the fiscal and monetary policies (labeled SRAS2). 200 180 160 140 w 120 100 80 60 40 20 Path 1 LRAS REAL GDP (Trillions of dollars) 9 RAS RAS 10 w 200 180 160 140 120 100 80 60 40 20 Path 2 LRAS REAL GDP (Trillions of dollars) 9 RAS RAS 10 Which path is the economy most likely to take if every worker in the economy behaves according to the theory of adaptive expectations? Path 1 Path 2 Grade It Now Save & Continue Continue without saving