Aggregate demand for final goods consists of _______.
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Government spending
Aggregate demand is the total planned spending on final goods. In a closed economy, it is made up of consumption, investment and government spending. In an open economy, exports minus imports are added to it.
Option (1) Government spending — Correct. What the government spends on goods and services is a direct source of demand.
Option (2) Imports — Incorrect. Imports are demand for foreign goods. They reduce the demand for domestic goods, so they are subtracted.
Option (3) Savings — Incorrect. Savings are the part of income that is not consumed, so they are not spending on goods.
Option (4) Taxes — Incorrect. Taxes are payments to the government. They leave people less income to spend.
NCERT (2026-27): “4.1.1 Consumption … Let us also look at another dimension of this, savings. Savings is that part of income that is not consumed.… 4.2 Determination of Income in Two-sector Model In an economy without a government, the ex ante aggregate demand for final goods is the sum total of the ex ante consumption expenditure and ex ante investment expenditure on such goods, viz. AD = C + I.… …At this point, we can introduce a government in this economy. The major economic activities of the government that affect the aggregate demand for final goods and services can be summarized by the fiscal variables Tax (T) and Government Expenditure (G), both autonomous to our analysis. Government, through its expenditure G on final goods and services, adds to the aggregate demand like other firms and households. On the other hand, taxes imposed by the government take a part of the income away from the household…” NCERT (2026-27), chapter ‘Open Economy Macroeconomics’: “6.1.1 Current Account … Buying foreign goods is expenditure from our country and it becomes the income of that foreign country. Hence, the purchase of foreign goods or imports decreases the domestic demand for goods and services in our country…” |