Assume consumers expect a recession to begin in the next few months. They might

Question

Assume consumers expect a recession to begin in the next few months. They might react by trying to save more in case they are laid-off or have to work reduced hours. Under these circumstances, what would happen to the equilibrium prices and quantities of the goods the consumers usually buy?

1-Equilibrium price and quantity would both increase.
2-Equilibrium price and quantity would both decrease.
3-Equilibrium price would decrease and equilibrium quantity would increase.
4-Equilibrium price would increase and equilibrium quantity would decrease.

Explanation / Answer

Assume consumers expect a recession to begin in the next few months. They might react by trying to save more in case they are laid-off or have to work reduced hours. Under these circumstances, what would happen to the equilibrium prices and quantities of the goods the consumers usually buy? When consumers expect a recession and the spend less money, demand decreases, which means that the demand curve shifts to the left (inward). When demand decreases, equilibrium price and quantity decrease. 2-Equilibrium price and quantity would both decrease.

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