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The stay home order issued by many states, led to a significant drop in consumption. Using...

The stay home order issued by many states, led to a significant drop in consumption. Using the Keynesian cross explain the effects of such a drop on output. (hint: verbally explain the shifts and movements in the model)

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Answer #1

Suppose, there is a significant drop in the Consumption in the Economy. It would lead to a Decrease in Aggregate Demand in the Economy.

A Decrease in the Aggregate Demand would Shift down the Aggregate Demand Curve. This New Aggregate Demand Curve would cut the Y=AD line a new point which corresponds to a lower output in the Economy. This means that the output in the Economy Decreases. Decrease in Output is greater than the Decrease in the Consumption due to the working of the Multiplier Effect.

So, due to a significant drop in the Consumption in the Economy, Aggregate Demand would Decrease and as a result of that, Output in the Economy would also Decrease.

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