Question

Which of the following would cause a decrease in real GDP and, if large enough, a recession?

a. an increase in interest rates that causes short-run aggregate supply to fall.
b. an increase in government purchases that causes aggregate demand to rise.
c. a reduction in consumer confidence that causes short-run aggregate supply to fall.
d. a reduction in consumer confidence that causes aggregate demand to fall.

Answer 1

A reduction in consumer confidence that causes aggregate demand to fall would cause a decrease in real GDP and, if large enough, a recession.

Step-by-step explanation:

In this scenario, a reduction in consumer confidence that causes aggregate demand to fall would cause a decrease in real GDP and, if large enough, a recession.

When consumer confidence is low, people are less likely to spend money on goods and services. As a result, aggregate demand decreases, leading to a decrease in real GDP. If this decrease in aggregate demand is significant enough, it can lead to a recession.

For example, during a recession, people may be worried about their job security and future financial stability, so they may cut back on spending and save more. This decrease in consumer spending can have a negative impact on businesses, leading to lower output, investments, and employment.