Question

1. Aggregate demand is measured by:

A. C+ I + G - X - M

B. C - I - G - X - M

C. C + I + G + X + M

D. C + I + G + X - M

2. Which of the following statements is likely to be true?

A. Consumption is likely to increase with income

B. Consumption is likely to increase with higher interest rates

C. Consumption is always equal to investment

D. Consumption is always equal to savings

3. Which of the following is most likely to occur following an increase in aggregate demand?

A. An increase in prices and output

B. An increase in output and fall in prices

C. A decrease in prices and output

D. An increase in prices and fall in output

Answer 1

1. The aggregate demand is the sum of consumption expenditure (C), investment expenditure (I), government spending (G) and net exports (X - M). So,

AD = C + I + G + X - M

Therefore, the correct answer is 'Option D'.

2. When there is an increase in income then consumers have more money in hand which they can spend for consumption purpose leading to an increase in consumption expenditure. Therefore, the correct answer is 'Option A'.

3. When there is an increase in the aggregate demand, the AD curve shifts to the right as a result of which there is excess demand in the economy leading to na increase in the overall price level and the equilibrium output. So, the correct answer is 'Option A'.