The effect of a shift in the aggregate demand curve due to an increase in consumer confidence will be:
A) an increase in both prices and output in the short run.
B) a decrease in prices only in the long run; output will remain the same.
C) a decrease in both prices and output in the short run.
D) an increase in output only in the long run; prices will remain the same.

Question

Quizplus · Accepted Answer

An increase in consumer confidence will lead to an increase in consumption and investment spending, resulting in a rightward shift in the aggregate demand curve. In the short run, this will lead to an increase in both prices and output as firms increase production to meet the higher demand. However, in the long run, as the economy adjusts, prices will stabilize and output will increase.

The Effect of a Shift in the Aggregate Demand Curve