Question

What is/are the component(s) of aggregate demand in an open economy?

• A. Consumption
• B. Consumption + Government expenditure
• C. Investment
• D. Consumption + Investment + Government expenditure + Net export (X - M)

Hint:

Aggregate demand in an open economy is the sum of consumption, investment, government spending, and net exports (exports minus imports).

Answer 1

The Correct Option is D

Step 1: Understanding Aggregate Demand in an Open Economy:
In an open economy, aggregate demand consists of the total demand for goods and services within the economy. It includes the following components: - Consumption (C): The total expenditure by households on goods and services.
- Investment (I): The total spending on capital goods by businesses and households.
- Government Expenditure (G): The spending by the government on goods and services, including public services and infrastructure.
- Net Exports (X - M): The difference between exports (X) and imports (M). In an open economy, the export and import of goods and services are crucial components of aggregate demand.
Step 2: Analyzing the Options:
- Option (A): Consumption is just one part of aggregate demand, but it doesn't represent the full picture in an open economy.
- Option (B): While consumption and government expenditure are important, this option misses investment and net exports.
- Option (C): Investment is an essential part of aggregate demand, but it does not include all components, such as consumption and net exports.
- Option (D): This is the correct answer because it includes all the major components of aggregate demand in an open economy: consumption, investment, government expenditure, and net exports.
Step 3: Conclusion and Answer:
The correct answer is (D) because it fully encompasses all the components of aggregate demand in an open economy.