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scenario below, use the aggregate expenditure - output model to discuss what will happen to the AE and equilibrium level of output? A financial crisis occurs, retirement savings are halved and people become increasingly fearful that they will lose their jobs
scenario below, use the aggregate expenditure - output model to discuss what will happen to the AE and equilibrium level of output? A financial crisis occurs, retirement savings are halved and people become increasingly fearful that they will lose their jobs. Explain how a financial crisis might affect the overall spending. Illustrate the result using the total expenditure graph. a. AE rises and AE line shifts upward, equilibrium level of output rises. b. AE falls and AE line shifts downward, equilibrium level of output falls. c. AE falls and AE line shifts upward, equilibrium level of output rises.
Expert Solution
A financial crisis occurs. Retirement savings are halved and people become increasingly fearful that they will loose their job. Therefore, people will lower their Spending and try to save more so that they can finance their expenditure in the future. This will decrease overall spending, Aggregate expenditure curve will shift downward. As a result, equilibrium level of output falls.
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