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Consumer confidence and business confidence both drop sharply. What does this do to the AD curve, and to the new equilibrium output and price level?
AAD shifts left; equilibrium output and price level both fall
BAD shifts right; equilibrium output and price level both rise
CAD shifts left; equilibrium output falls but the price level rises
DAD does not shift; confidence only affects aggregate supply
Answer & Solution
Correct answer: A. AD shifts left; equilibrium output and price level both fall
1. Falling confidence lowers both consumption spending and business investment spending, two components of AD.
2. Since at least one AD component falls, the whole AD curve shifts to the left.
3. A leftward AD shift moves the new equilibrium along the AS curve to a lower output and a lower price level.
4. Option C gets the price-level direction wrong, and option D misidentifies which curve confidence affects.
_Source: OpenStax Principles of Macroeconomics for AP Courses (CC BY 4.0), Ch 10 "The Aggregate Demand/Aggregate Supply Model", section 10.4 | Shifts in Aggregate Demand_
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