Consumer and investor optimism and pessimism matter a great deal in the
economy. Suppose that survey measures of consumer confidence indicate a wave
of pessimism is sweeping the country. If policymakers do nothing, what will
happen to aggregate demand? What should the Federal Reserve do if it wants
to stabilize aggregate demand? If the Federal Reserve does nothing, what do
you think might Congress (fiscal policy) do to stabilize aggregate demand?
Why do you think consumer and investor confidence affect AD and hence the
One of the most debated areas in economics is balancing the budget. The
major contention is on the timing of the policy. If the government were to
operate under a strict balanced-budget rule, what do you think would it have
to do in a recession? Should it follow the strict rule? Would that make the
recession more or less severe? Why?