Pessimism

Question

Suppose the economy is in long-run equilibrium. Then because of corporate scandal, international tensions, and loss of confidence in policymakers, people become pessimistic regarding the future and retain that level of pessimism for some time.

Refer to Pessimism. In the short run what happens to the price level and real GDP?
a.

The price level falls and real GDP rises.
b.

The price level rises and real GDP falls.
c.

Both the price level and real GDP fall.
d.

Both the price level and real GDP rise.

Answer 1

In the scenario described, where people become pessimistic about the future due to corporate scandals, international tensions, and loss of confidence in policymakers, we can analyze the likely short-run effects on the price level and real GDP.

Pessimism typically leads consumers and businesses to decrease their spending and investment, which results in a decrease in aggregate demand. When aggregate demand decreases, this tends to lower the price level and reduce real GDP in the short run.

Given that analysis, the correct answer would be:

c. Both the price level and real GDP fall.