Question

Which of the following is NOT a component of aggregate demand?

• A. Investment
• B. Consumption
• C. Exports
• D. Savings

Answer 1

The Correct Option is D

To determine which option is NOT a component of aggregate demand, we need to understand the typical components of aggregate demand. Aggregate demand is calculated using the formula:

\(AD = C + I + G + (X - M)\)

Where:

• C stands for Consumption - total spending by households on goods and services.
• I stands for Investment - expenditure on capital goods that will be used for future production.
• G stands for Government Spending - total government expenditure on goods and services.
• X stands for Exports, and M for Imports - the net exports, calculated as exports minus imports.

In this context, the listed options were:

• Investment
• Consumption
• Exports
• Savings

Savings is not a direct component of aggregate demand. Instead, savings represent the portion of income that is not spent on consumption, and it can indirectly affect investment, which is a component of aggregate demand. Therefore, Savings is the correct answer as it is NOT a component of aggregate demand.

Answer 2

Aggregate demand refers to the total demand for goods and services in an economy at a given overall price level and during a specific period. It is the sum of various components that contribute to the overall demand in the economy, including investment, consumption, and exports.

Investment represents spending by businesses on capital goods, such as machinery, equipment, and buildings, which contributes to future production capacity.

Consumption refers to spending by households on goods and services for personal use. It is the largest component of aggregate demand in most economies.

Exports are goods and services produced domestically but sold to foreign buyers. The spending on these exports contributes to the demand for domestically produced goods and services.

However, savings are not part of aggregate demand. Savings represent income that is not spent and is instead set aside for future use. While savings can affect investment in the long term by providing funds for lending, they do not directly contribute to the immediate demand for goods and services in the economy. Therefore, while savings influence economic activity, they are not included in the calculation of aggregate demand.