Question

Pretend that household debt within a country increases due to consumers taking out more loans to pay for trivia crack and design home in-app purchases. Draw an initial aggregate demand curve and show how it will be affected when this shock occurs.

Answer 1

It is given that there is an increase in the household debt due to higher consumption committed previously in different aspects of home improvement. Now because of increased debt it is likely that they reduce their current consumption and save more to repay the debt. This will decrease consumption expenditure and aggregate expenditure and that tge aggregate demand curve will shift to the left. Real GDP and price level will decline in the short run