Answer to Question #64272 in Macroeconomics for Jasmine

Question

The Canadian consumer confidence rebounded sharply in September 2012. This is a significant rebound since the plunge in October 200. According to some analysts, the good news from Europe and the jump in the stock market appear to have had an effect on Canadian consumer confidence.
a. Explain the various factors that buoyed the Canadian consumer confidence in 2012.
b. Explain and draw a graph to illustrate how a rise in consumer confidence can change real GDP and the price level in the short-run.
c. If the economy was operating at full-employment equilibrium, describe the state of equilibrium after the increase in consumer confidence. In what way might consumer expectations have a self-fulfilling prophecy?
d. Why do changes in consumer spending play such a large role in the business cycle?
e. Explain how the economy can adjust in the long-run to restore full-employment equilibrium. Draw a graph to illustrate this adjustment.

Answer 1

a. The factors that buoyed the Canadian consumer confidence in 2012 are some expectations about price level, inflation and overall situation in economy.
b. A rise in consumer confidence can increase real GDP and the price level in the short-run after the increase in consumer spending and aggregate demand.
c. If the economy was operating at full-employment equilibrium, then there may appear inflationary gap after the increase in consumer confidence.
d. The changes in consumer spending play such a large role in the business cycle, because it can increase aggregate demand, which will increase real GDP.
e. The economy can adjust in the long-run to restore full-employment equilibrium by the decrease in aggregate supply.