Question

During 2008 in the United States, consumer confidence fell significantly. Which of the following will occur as a result of this reduction in consumer confidence?

A) the LM curve will shift up.
B) the LM curve will shift down.
C) the IS curve will shift rightward.
D) the IS curve will shift leftward.
E) the IS curve will shift rightward, and the LM curve will shift up.

Answer 1

The correct answer is option D.

Step-by-step explanation:

A reduction in consumer confidence will cause the IS curve to move leftwards. The IS curve is short for the investment savings curve. It shows the equilibrium in the goods market. It shows different combinations of interest rates and income where the goods market is in equilibrium.

A change in consumer spending causes a shift in the IS curve. A reduction in consumer confidence will cause consumers to spend less. This reduction in consumer spending will further cause the IS curve to shift to the left.