For a given level of inflation, if a stock market crash makes consumers less willing to spend (the wealth effect), then the _____ shifts _____.[Fill in the blank]

Question

BlackTom AI · Accepted Answer

A decline in household wealth reduces consumption at every given price level, so the aggregate-demand (AD) curve shifts left.

1) Relevant concepts:
- Aggregate demand equals C + I + G + NX; consumption (C) is a large component.  
- The AD curve shows the relationship between the price level (or inflation) and real GDP demanded.  
- A negative wealth effect (stock-market crash) lowers consumers’ willingness to spend, reducing C for any given price level.  
- Short-run aggregate supply (SRAS) is driven by production costs, input prices, and expectations, not by household wealth directly.

2) Step-by-step reasoning:
- Start with the scenario: stock-market crash → consumers feel poorer → consumption falls.  
- Because consumption is part of AD, a fall in C reduces total planned expenditure at each price level.  
- On an AD–AS diagram, a reduction in expenditure at every price level is represented by a leftward shift of the AD curve (less real GDP demanded at each inflation/price level).  
- No immediate change in resource costs or production technology is specified, so SRAS does not shift.

3) Calculations: none required; logical causal chain is sufficient.

4) Why the correct answer is correct:
- The wealth effect directly reduces aggregate demand (through lower C), so the AD curve shifts leftward for a given inflation/price level.

5) Why the other options are incorrect:
- (a) aggregate-demand curve; right — wrong direction: spending falls, so AD shifts left, not right.  
- (c) short-run aggregate-supply line; upward — SRAS is not directly affected by a wealth-induced fall in consumption, and “upward” is not the standard description of a shift.  
- (d) short-run aggregate-supply line; downward — SRAS similarly is unaffected; downward movement would describe a shift in the wrong curve for this demand-side shock.

Conclusion: Therefore the correct choice is b. aggregate-demand curve; left, matching the provided answer.

For a given level of inflation, if a stock market crash makes consumers less willing to spend (the wealth effect), then the _ shifts _.[Fill in the blank]Single choice

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For a given level of inflation, if a stock market crash makes consumers less willing to spend (the wealth effect), then the _____ shifts _____.[Fill in the blank]Single choice