State with reasons whether you agree or disagree with the following statements.
1) Aggregate demand depends only on the consumption expenditure.
Answer: The above statement is incorrect. Apart from consumption expenditure, the aggregate demand also depends on the investment, government expenditure and net exports. It consists of the following components.
Demand by households - Private consumption expenditure (C)
Demand by firms - Private investment expenditure (I)
Demand by government - Government expenditure (G)
Demand by foreign sector- Net exports (X – M)
Where, X is exports and M is imports.
Thus,
AD = C + I + G + (X – M)
