suppose an unanticipated decrease in foreign spending on domestically produced goods causes the aggregate demand curve to shift to the left (from AD1 to AD2 ). According to adherents of the adaptive-expectations theory, the unanticipated change in aggregate demand will cause the economy to move in which direction

Under the adaptive expectations theory, individuals and businesses base their future economic expectations using past events and experiences as their starting point. E.g. if the economy has been constantly growing steadily for the past 4 years, people and businesses will expect that it continues to grow in a similar way in the near future.

In this case, since the aggregate demand decreased (leftward shift) but this was the result of an unanticipated decrease in exports, economists, individuals and businesses will believe that the economy will not be affected and shall soon return to its normal path. The problem is that the economy actually starts to shrink, and since no adjustments are made on time, the problem will not improve, instead it will get worse. Eventually, once the people and businesses realize the negative effect on the economy, they will react abruptly.

This happened during the Great Recession when everyone thought that the prices of homes would increase forever, but once people realized their mistake, panic spread and the economy collapsed. This is not the same situation, but the negative effects will be eventually felt.

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