Assume that consumer confidence decreases, so that fixed consumption decreases by 200 (billions of $, assume that Y is measured in B of $). Furthermore, the marginal propensity to consume is 80%. Using the 4-panel diagram, you will determine what happens in each panel, except you will ignore the AD/AS panel for this question. For all graphs, label the initial equilibrium point A, the final equilibrium as point C, and you will use point B to illustrate the impact of the exogenous change, (holding either r or Y constant).

a. Determine the decrease in Y as a result of the decrease in consumption, C(0). Does this decrease in consumer confidence shift the IS curve or the LM curve?

b. Draw a 4-panel diagram (except ignore the 4th AD/AS panel), labeling as many numerical values as possible. In your diagram, label point B after C(0) decreases, but assuming the interest rate is constant. As noted above, point C is your final equilibrium. Be sure to label points A, B, C in all three panels.

c. For your final equilibrium point C, why does aggregate output "pullback" somewhat relative to point B?

Explain intuitively.