If the economy shown in the figure begins at point C, an increase in consumer confidence leads to what changes in the short run?
A) an increase in unemployment
B) cost-push inflation
C) a decline in tax revenue
D) demand-pull inflation

Question

If the economy shown in the figure begins at point C, an increase in consumer confidence leads to what changes in the short run? 
A) an increase in unemployment 
B) cost-push inflation 
C) a decline in tax revenue 
D) demand-pull inflation

Quizplus · Accepted Answer

An increase in consumer confidence will lead to an increase in aggregate demand as consumers will be more willing to spend. This will lead to an increase in real GDP and a decrease in unemployment in the short run. However, since the economy is already operating close to full capacity at point C, the increase in aggregate demand may lead to demand-pull inflation as firms increase prices to meet the increased demand.

If the Economy Shown in the Figure Begins at Point