Question

Aggregate demand for final goods consists of:

• A. Government spending
• B. Imports
• C. Savings
• D. Taxes

Answer 1

The Correct Option is A

Aggregate demand represents the total demand for final goods and services in the economy, including consumption, investment, government spending, and net exports (exports minus imports). Imports, savings, and taxes are considered leakages, not part of aggregate demand directly. Therefore, government spending is the correct answer.

Answer 2

Aggregate demand represents the total demand for final goods and services in the economy at different price levels, and it includes four main components: consumption, investment, government spending, and net exports (exports minus imports). These components collectively determine the overall demand for goods and services in the economy.

Imports, savings, and taxes are considered leakages in the economy because they remove money from the flow of income. For example, when individuals save part of their income, it is not spent on consumption, reducing the immediate demand for goods and services. Similarly, taxes and imports represent money that flows out of the domestic economy, limiting the amount available for domestic spending.

Therefore, government spending is the correct answer as it is one of the key injections into the economy. Government spending directly contributes to aggregate demand by increasing the demand for goods and services, stimulating economic activity, and supporting the overall economy.