People expect that the El Nino effect will cause drought in Australia in coming years. If most firms expect their profits will fall during the next five years, Australia's this year.
A) aggregate demand will decrease
B) long- run aggregate supply will increase
C) short- run aggregate supply will increase
D) aggregate demand will increase

Question

Quizplus · Accepted Answer

If most firms expect their profits to fall during the next five years, they are likely to decrease investment and reduce hiring. This would cause a decrease in aggregate demand, as firms reduce their spending. The El Nino effect causing drought would only exacerbate the situation, as it could further reduce agricultural output and consumer spending. As a result, Australia's economy is likely to experience a decrease in aggregate demand in the short to medium term.

People Expect That the El Nino Effect Will Cause Drought