A decrease in consumer confidence about job security may affect consumption spending and be most likely to cause which of the following?
a A decrease in employment and perhaps an increase in inflation
b A decrease in employment and perhaps a decrease in inflation
c An increase in employment and perhaps an increase in inflation
d An increase in employment and perhaps a decrease in inflation
The correct answer and explanation is:
The correct answer is b) A decrease in employment and perhaps a decrease in inflation.
Explanation:
A decrease in consumer confidence about job security typically leads to a reduction in consumer spending. This happens because consumers become more cautious about their future financial situation, which makes them less willing to spend money on goods and services. When consumer spending declines, businesses may experience a decrease in demand for their products or services. In response, businesses might cut back on production, reduce hiring, or even lay off workers, leading to a decrease in employment.
As employment decreases, the overall demand for goods and services continues to fall, which could lead to a decrease in inflationary pressures. Inflation tends to rise when demand for goods and services outpaces supply, but if demand decreases, businesses may lower prices to encourage consumption or to clear excess inventory. This scenario would lead to lower inflation or even deflation in some cases.
In summary, when consumers feel less confident about job security, they spend less, which in turn leads to lower demand, potentially fewer jobs, and lower inflation. This is why option “b” is the most likely outcome.