Question

It's a Recession 75 Percent of Americans Say 140 Price level (GDP deflator, 2007=100) LAS SASO 130 In a telephone poll of over 1,000 adult Americans, 75 percent said they believe the nation is now in a recession. Of those who think the economy is in a recession, 27 percent said they believe we are in a serious rocossion Americans are less confident in the future of the economy than they were in March. The poll showed that 23 percent believe the downturn will last more than two years, up from 19 percent in March CNN, July 7. 2008 120 110 100- AD The graph shows the economy when consumers experience a decrease in consumer confidence Draw a curve that shows how the economy returns to a full-employment equilibrium with no intervention by the government or central bank Label it Draw a point at the new long-run macroeconomic equilibrium 90- The economy returns to a full-employment equilibrium as 11.0 OA the money wage rate falls OB expected future profits fails Oc the expected future inflation rate falls OD. the money wage rato rises AD 30 196 10.0 120 130 140 150 Real GDP (trillions of 2007 dollars) (15,80) >> Draw only the objects specified in the question

Answer 1

Ans. Option c

Due to fall in consumer confidence, the price level has decreased, so, in long run, production units revise their expectations of the price level downwards leading them to increase the production. This will increase the aggregate supply of goods and services in the market shifting the aggregate supply curve to the right from SAS0 to SAS1. This will increase the real GDP back to full employment level and will decrease the price level further.

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Price level (GDP defiafor, 2007-100) 140- LAS SAS. 1304 120 SAS1 110- > 100- ADO 90 B01 90 AD 10.0 11.0 120 13.0 140 Real GDP (trillions of 2007 dollars)