Given an economy that is operating at less than the full employment level, analyze the effects of an increase in consumer confidence on the following markets. Start with an initial equilibrium in each market.
1. The market for goods and services and the relevant variables in the market.
2. The money market and the relevant variables in the market.
3. The foreign exchange market and the relevant variables in the market.
4. The market for single family homes and the relevant variables in the market.
5. The market for household furniture and the relevant variables in the market.
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First, let us try to understand what happens when there is an increase in consumer confidence. Clearly, the immediate effect is that consumers believe that the economy is growing strong, and believe that they are not going to lose their jobs (or they will quickly find a job in the case of unemployed consumers). Thus consumers purchase more goods when their confidence is high.
i) When consumers buy more goods (or services), the aggregate demand for goods increases. Firms will soon realize that inventory level has dropped, and need to increase production in order to meet this increase in demand. Since the labour market isn't at full ...