Question

5. Use the Aggregate Expenditures Model developed in class to answer the following question.

Assume that there is an increase in consumer confidence (CC increases).

5. Following the increase in consumer confidence, what will happen to unemployment in this model?

Group of answer choices

none of the above

decrease

increase

will not change

6. Use the Aggregate Expenditures Model developed in class to answer the following question.

Assume that there is an increase in consumer confidence (CC increases).

6. Following the increase in consumer confidence, what will happen to the interest rate in this model?

Group of answer choices

the interest rate will increase

the interest rate will not change (exogenous)

the interest rate will decrease

None of the above

Answer 1

5) If there is an increase in the consumer confidence, Consumption Expenditure in the Economy Increases. This would lead to an upward shift in the Aggregate Expenditure curve. This will cause an increase in the Real GDP and Employment. Hence, this would lead to a Decrease in the Unemployment.

So following the increase in Consumer confidence, Unemployment in the model would Decrease.

Hence, Second Option is correct.

6) Increase in the consumer confidence would Increase the GDP in the Economy. However, the interest rate will not change in the Economy as it is exogenous (determined outside the model).

Hence, Second Option is correct.