Consumer Confidence Shock
The question
Assume the economy of Beltran is initially in long-run equilibrium. A wave of pessimistic economic forecasts leads households to sharply cut back on spending and increase saving. Show the short-run effect on Beltran's economy, holding all else constant. Show the effect on the AD-AS Model graph.
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Consumer Confidence Shock: the worked answer
On the AD-AS Model graph, AD shifts left.
Why AD shifts left
Falling consumer confidence reduces consumption, the largest component of aggregate demand. Total spending falls at every price level, shifting aggregate demand to the left. Because input costs, resources, and technology are unaffected, the short-run and long-run aggregate supply curves do not shift.
What happens to the equilibrium
The equilibrium price level falls and real GDP declines below full-employment output, creating a recessionary gap.
The mistake students make on this one
Students commonly add a leftward SRAS shift because they associate a downturn with struggling firms. Firms do produce less, but that is a movement along an unchanged SRAS caused by weaker spending; nothing has changed what it costs a firm to make one unit of output.
On exam day
Sort the shock by who acted. Households changed their spending plans, so the answer is an AD shift, and the fall in output is a recessionary gap measured horizontally from the new equilibrium to LRAS.
How this is graded
The checker reads every curve's position before and after your answer. You are marked correct only when AD shifts left and every other curve on the AD-AS Model graph stays where it started — the same standard an AP reader applies to a drawn graph: the right shift, and nothing extra. There is no AI involved; the rubric is the geometry.
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