Question

Suppose consumers and investors suddenly become more pessimistic about the future and therefore decide to reduce...

Suppose consumers and investors suddenly become more pessimistic about the future and therefore decide to reduce their consumption and investment spending. How will a market economy adjust to this increase in pessimism?

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1


Ans. Increased pessimism decreases consumption and investment spending leading to decrease in aggregate demand for goods and services this shifts the aggregate demand curve leftwards from AD to AD'. This at given aggregate supply leads to decrease in price level from P to P' and equilibrium output from Y to Y'.

In long run, this decrease in price level makes production units to revise their inflation expectations downwards leading to increase in aggregate supply shifting the aggregate supply curve from AS to AS'. This leads to an increase in equilibrium output from Y' to full employment level Y and decreases prices further to P".

* Please don’t forget to hit the thumbs up button, if you find the answer helpful.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
  3.   Suppose that consumers become pessimistic about the future health of the economy, and so cut back...
  3.   Suppose that consumers become pessimistic about the future health of the economy, and so cut back on their consumption spending. What will happen to aggregate demand and to output? What might the government have to do to keep output stable?             4.   Suppose the Federal Reserve, which is the central bank of the U.S., decided to lower the monetary policy interest rate. Use the macroeconomic model to analyze the possible effects of this event on Canada’s net capital outflow, net exports, and...
5. Suppose that American firms become more pessimistic and decide to reduce investment expenditure today in...
5. Suppose that American firms become more pessimistic and decide to reduce investment expenditure today in new factories and office space. How will this decrease in investment affect output, interest rates, and the current account? (Please use graphs and explanation Thanks!!)
The recession of 2007-2009 made many consumers pessimistic about their future incomes. How does this increased...
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.
An important part of the “tech bust” in 2001 was that firms became more pessimistic about...
An important part of the “tech bust” in 2001 was that firms became more pessimistic about the future profitability of internet-related investment projects. In response, they substantially reduced their purchases of network equipment and software. 1. What effect will this “increased pessimism” have on long-term interest rates and the aggregate level of investment spending?   Discuss the initial shock, and describe how long-term real interest rates will change to bring about a new equilibrium.
Assume firms become pessimistic about future profitability of spending on new informational technology. With everything else...
Assume firms become pessimistic about future profitability of spending on new informational technology. With everything else constant, this causes the output gap to become______ and inflation rate to_______. In order for the output gap to return back to zero and inflation rate to return back to its original rate, the Fed should ______ the real interest rate. : A. negative; increase; decrease B. positive; decrease; increase C. negative; decrease; decrease D. positive; increase; increase
Suppose that an increase in consumer confidence raises consumers’ expectations about their future income and thus...
Suppose that an increase in consumer confidence raises consumers’ expectations about their future income and thus increases the amount they want to consume today. This might be interpreted as an upward shift in the consumption function. How does this shift affect investment and the interest rate?
1. Assume an economy is opersting below its full employment capacity and the MPC is .75,...
1. Assume an economy is opersting below its full employment capacity and the MPC is .75, a $50 billion increase in investment spending will cause the equilibrium output to rise by a)$5 billion b) $50 billion c) $10 billion d) $200 billion 2. when business and consumers become more optimitic about the future and increase their expenditures? a) real GDP rises and employment falls b) real GDp falls and employment rises c) real GDP and employment and income to decline...
Suppose that businesses and consumers get much more optimistic about the future of the economy. To...
Suppose that businesses and consumers get much more optimistic about the future of the economy. To stabilize output the Federal Reserve could a. buy bonds to raise interest rates. b. buy bonds to lower interest rates. c. sell bonds to raise interest rates. d. sell bonds to lower interest rates.
Suppose that US mutual funds suddenly decide to invest more in Canada. a. What happens to...
Suppose that US mutual funds suddenly decide to invest more in Canada. a. What happens to Canadian net captial outflow, Canadian saving and Canadian domestic investment? (6%) b. What is the long-run effect on the Canadian capital stock? (2%) c. How will this change in the capital stock affect the Canadian labour market? Does this US investment in Canada make Canadian workers better off or worse off? (7%)
1. If investors become LESS patient, then we would expect the nominal riskless interest rate to...
1. If investors become LESS patient, then we would expect the nominal riskless interest rate to ["increase", "decrease"] because investors want to consume ["more", "less"]    goods and services now. If they consume ["less", "more"] goods and services now, they want to   ["save more", "save less"]   which means they demand ["more", "fewer"]       bonds. If they demand ["more", "fewer"] bonds, the price of bonds decreases and the lower bond price results in an  ["decrease", "increase"]  in interest rates. 2. If investors...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT