Scenario 14-2. The economy is in long-run equilibrium. Suddenly, due to corporate scandals, international tensions, and the loss of confidence among policymakers, citizens become pessimistic concerning the future. They maintain this level of pessimism for a long time.
-Refer to Scenario 14-2. Initially, which curve shifts in which direction?
A)AD shifts right.
B)AD shifts left.
C)Short-run AS shifts left.
D)Short-run AS shifts right.

Question

Quizplus · Accepted Answer

The shift in the attitudes of citizens due to corporate scandals, international tensions, and the loss of confidence among policymakers will cause a decrease in consumption, investment, and government spending, leading to a decrease in aggregate demand (AD). Therefore, AD will shift leftwards. The short-run aggregate supply (SRAS) curve will remain unchanged initially, as this is a shock to demand, not supply.