Question

The impact of Hurricane Katrina on consumers in the economy was to make them very pessimistic about their future incomes. How does increased pessimism affect the aggregate demand curve? a. This moves the economy up along a stationary aggregate demand curve.b. This moves the economy down along a stationary aggregate demand curve.c. this will shift the aggregate demand curve to the left.d. this will shift the aggregate demand curve to the right.

Answer 1

Answer:

The correct answer is option c.

Explanation:

Because of a hurricane, there is a sense of pessimism among the consumers regarding their future incomes. This sense of pessimism would cause consumers to reduce their spending and save money for the future.  

This causes the consumption expenditure to decline. This reduction in the consumption expenditure will cause the aggregate demand to decrease as well. This will cause the aggregate demand curve to move to the left.  

This leftward shift in the aggregate demand curve will further cause the equilibrium price and quantity to decline.