Answer to Question #69726 in Macroeconomics for Heisenberg

Question

Use a diagram of the open economy model to illustrate and explain the effect of the following event on the market for loanable funds, the level of net foreign investment, the market for foreign-currency exchange, the market of good and services and the job market. In your answer make sure you discuss the impact on the following variables:
• Interest rates, public savings, private savings, national savings, investment, net foreign investment, supply of currency, the exchange rate and the level of net exports.
Event: There is a decline in consumer confidence in the economy
Note: Ignore the detail and politics of this event. Focus only on analysing the market adjustment in each case. Fully explain all the transmission mechanism.

Answer 1

A decrease in consumer confidence causes a decrease (leftward shift) of the aggregate demand curve. Other notable aggregate demand determinants include interest rates, federal deficit, inflationary expectations, and the money supply.
The household sector is thus inclined to spend less freely, especially reducing expenditures on durable goods, such as cars, houses, furniture, and appliances. Rather than spending as much, they save a little more. The result of this decrease in consumer confidence is a decrease in consumption expenditures and subsequently a decrease aggregate demand.