Aggregate Demand and its components

Correct answer: A. Downward pressure on income due to a fall in aggregate demand

Explanation: Saving is a leakage from current expenditure, while investment is an injection. If households save more but firms do not increase investment, planned spending may fall below the output level. Inventories can rise, leading firms to reduce production, employment, and incomes. Through the multiplier process, the initial decline in spending can produce a larger fall in equilibrium income.

Correct answer: A. When the economy is already near productive capacity

Explanation: Option A is correct because when an economy is already operating close to its productive capacity, firms have limited scope to increase real output. An increase in aggregate demand then creates excess pressure on available goods, labour, and resources. Prices and wages may rise faster, increasing inflation risk. When substantial unused capacity exists, higher demand can raise output and employment first.

Correct answer: C. Output, employment and the price level

Explanation: Aggregate demand represents planned spending in the whole economy, while aggregate supply represents the economy’s total production capacity or output. If demand is greater or smaller than supply, firms may change production and employment, and prices may rise or fall. Thus, the imbalance can influence output, employment and the general price level, making option C correct.

Correct answer: C. It is the demand of one consumer for one good

Explanation: Aggregate demand is the total planned expenditure on final goods and services in an economy during a period. Depending on the model, it includes consumption, investment, government expenditure and net exports. Demand by one consumer for one product is an individual or microeconomic demand curve, not aggregate demand. Hence, option C is the incorrect interpretation.

Correct answer: B. Aggregate supply, productive capacity, the price level, and employment conditions can also change outcomes.

Explanation: Aggregate demand affects output and employment, but the final macroeconomic result also depends on aggregate supply. Productive capacity, input costs, technology, labour availability, and the existing price level influence how far output can expand. Effective policy therefore considers demand and supply together.