Concern about international crisis has caused consumers to save their money and postpone big purchases. What is the effect on aggregate demand and aggregate supply?
A. No change
B. Aggregate supply will decrease, raising the price level and lowering real GDP
C. Aggregate demand will increase, lowering both real GDP and the price level
D. Both aggregate demand and aggregate supply will decrease, leading to lower real GDP
To determine the effect on aggregate demand and aggregate supply in this scenario, we need to consider the changes in consumer behavior.
When consumers are concerned about an international crisis and decide to save their money instead of making big purchases, it affects both aggregate demand and aggregate supply.
Aggregate demand refers to the total spending in an economy. In this case, consumers saving their money and delaying big purchases would cause a decrease in aggregate demand. This is because there is less spending happening in the economy, which results in a decrease in overall demand for goods and services. Therefore, we can eliminate options C and D, as they suggest an increase in aggregate demand.
Aggregate supply refers to the total production of goods and services in an economy. In this scenario, when consumers save their money and postpone big purchases, it can lead to a decrease in aggregate supply. This is because businesses may face weaker demand for their goods and services, which can lead them to reduce production. As a result, option B, which suggests that aggregate supply will decrease, is a plausible answer.
To conclude, the effect on aggregate demand and aggregate supply in this scenario is that aggregate demand will decrease, and aggregate supply will decrease. Therefore, the correct answer is option B – Aggregate supply will decrease, raising the price level and lowering real GDP.