Question

The recession of 2007-2009 made many consumers pessimistic about their future incomes. How does this increased pessimism affect the aggregate demand curve?

A) This will move the economy up along a stationary aggregate demand curve.

B) This will move the economy down along a stationary aggregate demand curve.

C) This will shift the aggregate demand curve to the left.

D) This will shift the aggregate demand curve to the right.

Explanation on the answer will really be helpful.

Answer 1

Option C.

Pessimism makes people feel less confident of something that might occur in the future.

It makes them less hopeful and they might fear to postpone their decisions to a later point of time.

Given that the recession of 2007-2009 made many consumers pessimistic about their future incomes.

This would increase their fear about earning less income in the future. Hence they prefer to save more at present rather than spending and hence their aggregate demand decreases.

This will eventually shift the aggregate demand curve to the left.