Question

Use the graph below to help you analyze and explain how the following event affects the variables a through d:

Event: Consumers become increasingly pessimistic and uncertain about the future direction of the economy.

a) Aggregate Demand or Aggregate Supply?

b) Increases or decrease Equilibrium Price level?

c) increase or decrease Real GDP?

d) increase or decrease Unemployment rate?

Answer 1

A) Pessimistic behavior and uncertainty of consumer will result in Decrease in consumption expenditure at same income levels.

So Decrease in consumption will decrease aggregate demand.

B) Decrease in aggregate demand will and no change in aggregate supply will decrease equilibrium price level.

C) Decrease in aggregate demand , Decrease real gdp.

D) Decrease in GDP result in increase in unemployment.