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5. The recent financial crisis has led to a decline in the consumer confidence. Explain how it affects short and long run equ
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In the short run, a decline in the consumer confidence will result in a decline in consumption of goods and the demands for goods because the consumers would rather prefer to save instead of spend. This will shift both IS and AD curve leftward in the short run as the economy contracts. This shift is shown in the graph given below as (1).

However, in the long run, the fall in the prices of goods might lead to an increased demand for goods and hence an increase in the output due to the rightward shift in the AD curve as well as the IS curve. This shift is shown in the graph given below as (2).

IS (1) w7. es 1S-M amaserk y LRAS AD, AD SRAS (1)> Ro-RS amuork (2) P! y 2.

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