The Conference Board publishes the Consumer Confidence Index (CCI) every month based on a survey of 5,000 representative U.S. households. It is used by many economists to track the state of the economy. A press release by the Board on June \(28,2011,\) stated: "The Conference Board Consumer Confidence Index, which had declined in May, decreased again in June. The Index now stands at \(58.5(1985=100)\), down from 61.7 in May." a. As an economist, is this news encouraging for economic growth? b. Explain your answer to part a with the help of the \(A D-A S\) model. Draw a typical diagram showing two equilibrium points \(\left(E_{1}\right)\) and \(\left(E_{2}\right) .\) Label the vertical axis "Aggregate price level" and the horizontal axis "Real GDP." Assume that all other major macroeconomic factors remain unchanged. c. How should the government respond to this news? What are some policy measures that could be used to help neutralize the effect of falling consumer confidence?

When the Consumer Confidence Index (CCI) decreases, it indicates that consumers are pessimistic about the economy's future. In this case, the CCI dropped from 61.7 in May to 58.5 in June. Since the CCI is a leading economic indicator, this decline implies a possible slowdown in economic growth.

The AD-AS model (Aggregate Demand – Aggregate Supply) is used to analyze the relationship between the aggregate price level and real GDP. A decrease in the CCI means consumers' spending will likely decrease in the upcoming months. As a result, aggregate demand (AD) will decrease, shifting the AD curve leftwards. Let's draw the AD-AS diagram. On the vertical axis, we have the "Aggregate Price Level," and on the horizontal axis, we have the "Real GDP." Before the decrease in CCI, we have an equilibrium point E1 where AD1 intersects AS (Aggregate Supply). After the decrease in CCI, AD shifts to AD2 (leftwards), creating a new equilibrium point E2 where AD2 intersects AS. From this diagram, it is clear that the aggregate price level decreases and real GDP also decreases, which suggests a slowdown in economic growth.

To neutralize the effect of falling consumer confidence, the government should implement expansionary policies that stimulate economic growth. There are two main types of policies: fiscal and monetary. Fiscal policy measures can include: 1. Increasing government spending: The government can invest in public projects, such as infrastructure or education. This will boost aggregate demand, stimulate job creation, and increase consumer and business confidence. 2. Cutting taxes: Reducing taxes will increase disposable income for households and businesses, which may lead to higher spending and investments. Monetary policy measures can include: 1. Lowering interest rates: By lowering interest rates, the central bank can encourage borrowing and spending by households and businesses. 2. Quantitative easing: The central bank can buy long-term government bonds or other financial assets, injecting money into the economy and increasing the money supply. This can help to lower long-term interest rates and stimulate spending. In conclusion, when facing falling consumer confidence, policymakers should consider a combination of fiscal and monetary policies to neutralize the negative effects on economic growth and help restore consumer and business confidence.