10. The Conference Board publishes the Consumer Confidence Index (CCI) every month based on a survey of 5,000 representative U.S. households. It is used by many economists to track the state of the economy. A press release by the Board on April 29, 2008 stated: “The Conference Board Consumer Confidence Index, which had declined sharply in March, fell further in April. The Index now stands at 62.3 (1985 = 100), down from 65.9 in March.”

a. As an economist, is this news encouraging for economic growth?

b. Explain your answer to part a with the help of the AD–AS model. Draw a typical diagram showing two equilibrium points (E1) and (E2). Label the vertical axis “Aggregate price level” and the horizontal axis “Real GDP.” Assume that all other major macroeconomic factors remain unchanged.

c. How should the government respond to this news? What are some policy measures that could be used to help neutralize the effect of falling consumer confidence?