Question

Suppose gasoline prices increased sharply and consumers became fearful of owning too many expensive cars. As a consequence, they cut back on their purchases of new cars and decided to increase their savings. How would this behavior shift aggregate demand curve? Using the short-run aggregate supply curve, what will happen to prices and output in the short run?

Answer 1

The sharp increase in gasoline prices and fear of owning expensive cars would lead to a decrease in consumer confidence and a decrease in consumption. This would shift the aggregate demand curve to the left

Step-by-step explanation:

As a result of the shift in aggregate demand, the equilibrium output and price level in the short run would both decrease. This is because the decrease in aggregate demand reduces the quantity of goods and services demanded, leading to a decrease in output. At the same time, the decrease in demand also reduces the upward pressure on prices, resulting in a decrease in the price level.