ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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A reduction in the level of unemployment
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An increase in spare capacity in the economy
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A reduction in the average level of interest rates
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An increase in aggregate demand
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Detailed explanation-1: -The correct answer is D; an increase in real interest rates. An increase in real interest rates reduces the investment expenditure as the cost of borrowing increases. It reduces aggregate spending, and therefore, aggregate demand.
Detailed explanation-2: -If the interest rate rises, say due to contractionary monetary or fiscal policy, investment will fall. Similarly, in the short run, expansionary fiscal policy will also cause investment to fall as crowding out occurs. Another interesting cause of a fall in investment is an exogenous decrease in investment spending.
Detailed explanation-3: -Which one of the following factors will most likely cause an increase in aggregate demand? An increase in net exports.
Detailed explanation-4: -Short-term changes in aggregate supply are impacted most significantly by increases or decreases in demand. Long-term changes in aggregate supply are impacted most significantly by new technology or other changes in an industry.