Question

Suppose there is a decrease in consumer confidence and the central bank controls the interest rate. Which of the following represents the complete list of variables that must decrease in response to this consumer pessimism?

A.Consumption.

B.Consumption and investment.

C.Consumption, output and the interest rate.

D.Consumption and output.

E.Consumption, investment and output

Answer 1

Option E.

• Given that the consumer confidence on an economy decreases when the central bank controls the interest rate.
• The drop in consumer confidence will cause the consumption, investment and output to fall.
• This is because consumer's usually make purchases or demand goods and services only when they have enough confidence on the overall state of an economy.
• When their confidence level decreases they will purchase less and save more. This will eventually cause the investments to fall as a result the output produced within an economy will also fall.