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When the housing bubble burst, overall household wealth dropped dramatically and credit markets seized up, a change economists call a demand shock. What did this shock do to the aggregate demand curve, and what evidence points to it?
AShifted left, evidenced by rising Great Recession unemployment
BShifted right, evidenced by falling unemployment
CDid not shift; only aggregate supply moved instead
DShifted left, yet unemployment fell as a result
Answer & Solution
Correct answer: A. Shifted left, evidenced by rising Great Recession unemployment
1. The bursting bubble wiped out household wealth and locked up new credit, both of which discourage spending.
2. Falling consumption and investment spending are demand-side changes, pushing the AD curve to the left.
3. A leftward AD shift lowers equilibrium output, which raises unemployment as firms need fewer workers.
4. The Great Recession's rising unemployment is the visible evidence pointing to this leftward shift.
_Source: OpenStax Principles of Macroeconomics for AP Courses (CC BY 4.0), Ch 10 "The Aggregate Demand/Aggregate Supply Model", section 10.6 | Keynes’ Law and Say’s Law in the AD/AS Model_
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