Figure: AD-AS Graph
Using the AD-AS graph shown, suppose the economy is initially at Point A when a reliable forecast is released that indicates a recession is forthcoming.
A) Illustrate the effect on the economy as consumers react to this forecast.
B) If uncertainty subsequently emerges over the length and severity of the shock in Part (A), how will the economy be affected? Comment on the role of intertemporal substitution and time bunching in this scenario.

Question

Figure: AD-AS Graph  
 Using the AD-AS graph shown, suppose the economy is initially at Point A when a reliable forecast is released that indicates a recession is forthcoming. 
A) Illustrate the effect on the economy as consumers react to this forecast.
B) If uncertainty subsequently emerges over the length and severity of the shock in Part (A), how will the economy be affected? Comment on the role of intertemporal substitution and time bunching in this scenario.

Quizplus · Accepted Answer

The Answer of Figure: AD-AS Graph  
 Using the AD-AS graph shown, suppose the economy is initially at Point A when a reliable forecast is released that indicates a recession is forthcoming. 
A) Illustrate the effect on the economy as consumers react to this forecast.
B) If uncertainty subsequently emerges over the length and severity of the shock in Part (A), how will the economy be affected? Comment on the role of intertemporal substitution and time bunching in this scenario.