Exam-style question
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Consumer confidence case on determinants of aggregate demand: which option identifies why consumption and investment may shift total planned spending?.
- A.Use a three-step chain: cause changes incentives, incentives change demand or supply behaviour, and the new equilibrium affects welfare or resource allocation.
- B.Short-run and long-run macroeconomic effects are identical.
- C.Aggregate demand is the same as demand in a single product market.
- D.Give a definition of aggregate demand and aggregate supply only, without application, chain of analysis, evaluation or judgement.
Model answer
What a good answer should say
- Correct answer: the option that links confidence, expectations and credit conditions to consumption or investment, then to aggregate demand.
- It should not describe aggregate supply.
Explanation
Why this works
This item tests the determinants of AD rather than the AD/AS model as a whole. The reasoning should focus on C, I, G, X and M components, with confidence and interest rates changing planned expenditure before output and prices respond.
Common mistake
No common mistake is linked to this question yet.