Question

Which of the following events would most likely reduce aggregate demand?
a) A reduction in the amount of existing capital stock.
b) A reduction in business and personal tax rates.
c) An increase in expected returns on investment.
d) An increase in real interest rates.

Answer 1

Answer:

d) An increase in real interest rates

Explanation:

Aggregate demand is defined as sum total of demand for goods and services within a country. It is expressed as the total cash that is exchanged for goods and services at a particular price level within a period of time.

An increase in interest rates will mean that cost of borrowing funds by businesses will increase.

The increased cost of running the business will cause prices of goods to rise.

Aggregate demand has an inverse relationship with price. As price rises aggregate demand will fall.

Consumers are less willing to buy expensive goods