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1. A change in overall consumer confidence will impact the macroeconomy. Here we will model a decrease in consumer confidence using the AD-AS and look

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1. A change in overall consumer confidence will impact the macroeconomy. Here we will model a decrease in consumer confidence using the AD-AS and look at how monetary policy can try and smooth out the business cycle. Our shock in this question will be: consumer confidence decreases, holding all else constant. Let's start with assuming the US was producing at the full-employment level of output (Yp) with an arbitrary price level (P) before the decline in consumer confidence. a. Represent the US economy at this point with an aggregate demand-aggregate supply graph. Label this initial equilibrium as point A. b. Consumer confidence decreases like mentioned above. Assuming this was the only change in the economy, show how this affects the short run equilibrium in your diagram in part a. Label this new point as point B

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