Answer to Question #47867 in Macroeconomics for Aditi
a. Explain, and draw a graph to illustrate, how declining consumer confidence can change real GDP and the price level in the short run.
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?
b. If the economy was operating at full-employment equilibrium, both equilibrium level of GDP and equilibrium price will decrease after the fall in consumer confidence. Consumer expectations may have a self-fulfilling prophecy. If firms and consumers expect future inflation then it can become a self-fulfilling prophecy. If workers expect future inflation, they are more likely to bargain for higher wages to compensate for the increased cost of living. If workers can successfully bargain for higher wages, this will contribute towards inflation.
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