Question

Imani said to Crystal: "I see no reason why a significant increase in the U.S. unemployment rate could eventually cause consumption and investment to decrease and lead to a recession.

Based on your study to date of economics, clearly explain the statement to Crystal in no more than 2 paragraphs Be specific.

Answer 1

When there is a significant increase in unemployment rate, many people will become job-less and the people having jobs will be cautious about their expenses. Therefore, there will be a fall in consumption. It will reduce the aggregate demand and the aggregate demand curve will shift towards the left. Now, when firms see that their sales is declining due to the fall in aggregate demand, they will start producing less and hire even less workers. When firms produce less, the aggregate supply curve also shift towards the left. The leftward shift in both the aggregate demand and aggregate supply curve would result in a lower output as well as a lower price level. Also, there will be less employment. This is what recession is in which output and employment falls.