Suppose a stock market crash makes people feel poorer. This decrease in wealth would induce people to
A) decrease consumption, which shifts aggregate supply left.
B) decrease consumption, which shifts aggregate demand left.
C) increase consumption, which shifts aggregate supply right.
D) increase consumption, which shifts aggregate demand right.

Question

Quizplus · Accepted Answer

When people feel poorer due to a stock market crash, they tend to decrease their consumption, as they are now uncertain about their future financial situation. This, in turn, shifts the aggregate demand curve leftward, as the demand for goods and services decreases. As a result, the equilibrium price level and real GDP both decline in the short run. Therefore, option B is the correct choice. Options A, C, and D are all incorrect, as they suggest an opposite relationship between consumption and aggregate supply/demand.

Suppose a Stock Market Crash Makes People Feel Poorer