In the new Keynesian view a decline in consumer confidence that leads to a shift left in the AD curve
A)will cause output to fall in the short run, but not in the long run.
B)will cause output to fall in both the short run and the long run.
C)will not cause output to fall in either the short run or the long run.
D)will cause output to fall only if prices are fully flexible.

Question

Quizplus · Accepted Answer

In the new Keynesian model, a decline in consumer confidence will cause a leftward shift in the AD curve, leading to a decrease in output in the short run due to sticky prices. However, in the long run, as prices become more flexible, output will return to potential level, and thus the decline in consumer confidence will not cause output to fall in the long run.

In the New Keynesian View a Decline in Consumer Confidence