Question

Since 2009 consumer confidence has Consistently risen from its lowest level since the inception of the consumer confidence index. The financial markets crisis has abated and credit availability has increased to many consumers, and the value of most stock indices suggest significant increases in the wealth holdings of many Americans. Using the real goods model (the 45° diagram), and the aggregate demand - aggregate supply model, diagram and explain the effects on the equilibrium levels of price and aggregate output, Y, of these changes.

Answer 1

Increase in the consumer confidence and increase in the wealth holdings of consumers has increased the overall consumption expenditure of the consumers which has led to increase in overall aggregate demand of the consumers and increase in aggregate expenditure of the consumers. In the real wage good model, this can be depicted by the upward shift of the aggregate expenditure curve of the economy to AE' and new equilibrium at E2 where the level of National income or output has increased in the economy. In the AS-AD framework, this can be depicted by the rightward shift of the aggregate demand curve of the economy to AD' and new equilibrium at point E2 where price level has increased in the economy and the level of national income has also increased in the economy.