Within the framework of the AD/AS model, if consumers and investors become more pessimistic about the future direction of the economy, this will lead to
A) an increase in aggregate demand.
B) a decrease in aggregate demand.
C) an increase in long-run aggregate supply (LRAS shifts to the right).
D) a reduction in the natural rate of unemployment.

Question

Quizplus · Accepted Answer

If consumers and investors become more pessimistic about the future of the economy, they are likely to reduce their spending and investment, which will decrease aggregate demand. This can lead to a decrease in output and an increase in unemployment in the short run. However, there is no reason to believe that LRAS will shift as a result of changes in consumer and investor sentiment.

Within the Framework of the AD/AS Model, If Consumers and Investors