Using the aggregate demand-aggregate supply model, predict what happens in the short run when the consumer confidence index falls as consumers become pessimistic about their economic prospects? a. The aggregate supply curve shifts right; the aggregate demand curve is not affected; price level decreases; real GDP increases. b. The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase. c. The aggregate demand curve shifts left; the aggregate supply curve is not affected; price level and real GDP decrease.

C) The aggregate demand curve shifts left; the aggregate supply curve is not affected; price level and real GDP decrease.

Explanation:

When consumers become pessimistic about economic prospects, they will decrease their total spending and increase their savings. In other words, the marginal propensity to consume decreases and the marginal propensity to save increases. This will cause the aggregate demand curve to shift to the left in a similar way as a decrease in income.

This shift in the aggregate demand curve is not really caused by any economic factor, so the aggregate supply curve will not be affected. The problem is that since total demand will decrease, then the price level will also decrease. A decrease in the price level will result in a decrease in the quantity supplied which in turn will lower real GDP.