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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

Because of the lockdown and the stay home order there has been a gradual reduction in the consumption. consumption is a significant part of aggregate expenditure and decline in consumption implies there is a decrease in aggregate expenditure as well. This implies that aggregate expenditure line will shift down.

With the 45 degree line, there will be a new equilibrium in the short run, at which the equilibrium GDP has decreased. this indicates that decrease in consumption will decrease equilibrium output. There is a downward movement along the original 45 degree line and a shift in the aggregate expenditure line.

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