In May 2019, worries about U.S. tariffs on China caused the Chinese stock market to fall by 5.5%. Ceteris paribus, which of the graphs shows the correct effect on aggregate demand?

A)Figure A
B)Figure B
C)Figure C
D)Figure D

Question

In May 2019, worries about U.S. tariffs on China caused the Chinese stock market to fall by 5.5%. Ceteris paribus, which of the graphs shows the correct effect on aggregate demand?

A)Figure A 
B)Figure B 
C)Figure C 
D)Figure D

Quizplus · Accepted Answer

The decrease in Chinese stock market caused by U.S. tariffs on China will lead to a decrease in household wealth and lower consumer confidence, which will shift the aggregate demand curve to the left. Figure B shows a leftward shift of the aggregate demand curve, resulting in a decrease in both equilibrium price level and quantity of output, which is consistent with the situation described. Choices A, C, and D show either rightward shifts of aggregate demand or shifts of aggregate supply, which are not consistent with the given information.

In May 2019, Worries About U