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Suppose the infection rates and death rates associated with Covid-19 have dropped drastically. As a result, there is 180-degree turn in the sentiments of both
Suppose the infection rates and death rates associated with Covid-19 have dropped drastically. As a result, there is 180-degree turn in the sentiments of both consumers and business firms. All of a sudden, they become optimistic about the future of the economy. (a) Explain how such change in confidence (or expectations) would affect consumption demand (C) and investment demand (D). (b) Explain how this would create a discrepancy in the interest rates between the loanable-funds market and the money market (i.e., rcredit vs. money). Then explain how to eliminate such interest- rate gap via EITHER an adjustment in the price level (i.e., P-adjustment) OR an adjustment in quantity of output demanded (i.e., Yd-adjustment). (c) Conclude how aggregate demand (AD) would respond to such change in sentiments
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