Answer to Question #44974 in Macroeconomics for Bob

Question

In October 2008, Canadian consumer confidence plunged to levels last seen in the 1982 recession. According to some economic analysts, the global credit crunch and major stock market declines appear to have had an effect on Canadian consumer confidence

a. Explain the various factors that weigh down consumer confidence in 2008

b. a. If the economy was operating at full-employment equilibrium, what is the state of equilibrium after the fall in consumer confidence? In what way might consumer expectations have a self-fulfilling prophecy?

c.a. Why do changes in consumer spending play such a large role in the business cycle?

d. a. Explain how the economy can adjust in the long run to restore full-employment equilibrium. Draw a graph to illustrate this adjustment process.

Answer 1

a. Explain the various factors that weigh down consumer confidence in 2008
The global credit crunch and major stock market declines influenced incomes and consumption, so as people had less ability to buy without credit money and income received, the consumption decreased.
b. If the economy was operating at full-employment equilibrium, what is the state of equilibrium after the fall in consumer confidence? In what way might consumer expectations have a self-fulfilling prophecy?
As consumption fall, the equilibrium price and quantity declined too. The consumer expectations were negative too, so the total supply of goods and services declined too.
c.Why do changes in consumer spending play such a large role in the business cycle?
Because the decrease in consumption will cause the decrease in investment and savings, which will have significant negative impact on the business cycle.
d. Explain how the economy can adjust in the long run to restore full-employment equilibrium.
In the long-run the expansionary fiscal policy may be implemented to support the investment and savings to run the economy from the recession.