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True or False: During the Great Recession, the aggregate expenditure curve shifted...

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lilylee | Student, College Freshman | (Level 1) Salutatorian

Posted June 26, 2013 at 11:06 PM via web

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True or False: During the Great Recession, the aggregate expenditure curve shifted downward and the short-run aggregate supply curve and the aggregate demand both shifted to the left.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted June 26, 2013 at 11:49 PM (Answer #1)

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This statement is true.  It has three parts to it, and all of them are correct.

When the “Great Recession” hit, economic activities of all sorts declined dramatically.  People stopped spending as much because they lost their jobs or because they feared that they would lose their jobs.  Businesses stopped investing because they were worried that there would be no demand for their products.  Basically, the amount of economic activity in the United States went down.  This led to decreases in all of the things mentioned in this question.

Aggregate expenditures are made up of such things as consumer consumption and business investment.  As we have seen, these things declined due to the recession.  Therefore, the aggregate expenditures curve dropped.

When the recession hit, businesses reduced capacity.  They laid people off.  They stopped trying to expand.  When they did these things, short run aggregate supply declined.  A decline in short run aggregate supply is represented by a movement of the curve to the left.

When the recession hit, people stopped buying as much.  This caused a drop in aggregate demand.  Such a drop is represented by a movement of the curve to the left.

Therefore, this statement is true.

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