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You're exactly right.

Submitted by Guest on May 10, 2008 - 16:29.

You're exactly right. According to the IS-LM model decrease in consumption leads to a decrease in demand, which in turn leads to a decrease in output. It's a big simplification of the actual economy, but what it boils down to is that the economy will readjust to a different, yet still stable, equilibrium with a lower level of output.

I'm always a little bit amused by how that decrease in output gets to people, especially because in biology we call rapid, uncontrolled growth "cancer", and we do our best to combat it. :)

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