The Conference Board of Canada publishes the Index of Consumer Confidence every month based on a survey posed to a sample of Canadian households. Many economists use it to track the state of the economy. A press release by the Board on May 30, 2017, stated: “The Conference Board of Canada’s Index of Consumer Confidence rose 2.1 points in May to 111.5 (2014 = 100). It was third increase in the last four months, offsetting the decline in April.”

a. As an economist, is this news encouraging for economic growth?

b. Explain your answer to part a with the help of the AD–AS model. Draw a typical diagram showing two equilibrium points (E1) and (E2). 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?