When the stock market rises, there is an increase in household wealth and consumers feel more confident about the economy, and as a result consumption increases.

(a) Assume that the U.S. economy was initially at its potential output level ( Y ). Graphically illustrate using the AS-AD model the effect of higher consumption levels on the U.S. economy. Be sure to label the axes, curves, use arrows to show shifts in curves, and market the equilibrium points: "A" for initial equilibrium; "B" for the short-run equilibrium; "C" for the long-run equilibrium.