Aggregate Demand & Aggregate Supply Practice Question

Use an aggregate demand and aggregate supply diagram to illustrate and explain how each of the following will affect the equilibrium price level and real GDP:

Consumers expect a recession

If consumer expect a recession then they will not spend as much money today as to "save for a rainy day". Thus if spending has decreased, then our aggregate demand must decrease. An aggregate demand decrease is shown as a shift to the left of the aggregate demand curve, as shown below. Note that this has caused both Real GDP to decrease as well as the price level. Thus expectations of future recessions act to lower economic growth and are deflationary in nature.