Question

A recent article declared that ‘mortgage, student, auto and credit card debt lead to an all-time high household debt in the United Stated of more than $13 trillion.’ If debt must be paid back at some future date at the expense of future consumption or investment, then at that future date we would expect:

• A.

  long run aggregate supply to shift left.

• B.

  long-run equilibrium.

• C.

  aggregate demand to shift left.

• D.

  short run aggregate supply to shift left.

Answer 1

It has been stated that household debt in the United States is at all-time high.

This debt has to be paid back at some future date.

Such repayment of debt at some future date will result in a decrease in consumption and investment at such future date.

Consumption and investment are components of the aggregate demand.

So, decrease in these two will result in a decrease in the aggregate demand.

A decrease in the aggregate demand shifts the aggregate demand curve to the left.

So,

At that future date we would expect aggregate demand to shift left.

Hence, the correct answer is the option (C).