How does consumer confidence interact with public policies when in a recession? How about in a boom? Does it make policies more effective or less effective in achieving economic stability? Why?
Consumer confidence refers to the level of willingness a consumer has to spend, borrow, and save. A high level of consumer confidence will encourage a higher marginal propensity to consume. If confidence falls because of uncertainty this can have an impact on other variables such as firms will delay investments too. So, if people expect a recession, confidence drops, spending decreases, creating a negative multiplier effect of lower growth and higher unemployment. Increased consumer confidence during an economic boom can push consumption and investments higher.
Consumer confidence can go either way depending on society’s confidence in the Fed’s policies. So, in achieving economic stability, policies become more effective because they can make people be confident therefore, increasing productivity.
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