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Question 52
Within the framework of the AD/AS model, if consumers and investors become more pessimistic about the future direction of
the cconomy, this will lead to
(1) an increase in aggregate demand.
(2) a decrease in aggregate demand.
(3) an increase in long-run aggregate supply (LRAS shifts to the right).
(4) a reduction in the natural rate of unemployment.

Ask by Wood Moran. in Cayman Islands
Mar 31,2025

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A decrease in aggregate demand occurs when consumers and investors become more pessimistic about the economy.

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Beyond the Answer

When consumers and investors start to feel pessimistic about the economy, they’re likely to cut back on spending and investment. This natural reaction will lead to a decrease in aggregate demand (option 2). With people saving more and spending less, businesses see lower sales, leading them to potentially cut back on production and even jobs.
On a related note, this pessimism can create a ripple effect where reduced spending lowers overall economic growth. Companies may delay new projects or halt expansions due to uncertainty, further impacting employment rates and overall economic health. Staying optimistic and investing during downturns can be tricky but is vital for a recovering economy!

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