Which of the following pairs about the ways in which aggregate demand can change is correctly matched?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → A change in consumption – can come from a change in C̄ or a change in c
Aggregate demand changes when consumption or investment changes. Consumption changes through C̄ or c; investment changes with credit and the rate of interest.
Option (1) Easy availability of credit – discourages investment — Incorrect. Easy credit encourages investment.
Option (2) A higher rate of interest – firms tend to raise investment — Incorrect. The rate of interest is the cost of funds, so at higher rates firms lower investment.
Option (3) A change in investment – can come only from a change in income — Incorrect. Investment is autonomous: it does not depend on income. Credit and the rate of interest can change it.
Option (4) A change in consumption – can come from a change in C̄ or a change in c — Correct. Consumption changes if autonomous consumption C̄ changes or if the MPC, c, changes.
NCERT (2026-27): “4.3.2 Effect of an Autonomous Change in Aggregate Demand on Income and Output … Thus, if aggregate demand changes, the equilibrium level of income changes. This can happen in any one or combination of the following situations: 1. Change in consumption: this can happen due to (i) change in C̄ (ii) change in c . 2. Change in investment: we have assumed that investment is autonomous. However, it just means that it does not depend on income. There are a number of variables other than income which can affect investment. One important factor is availability of credit: easy availability of credit encourages investment. Another factor is interest rate: interest rate is the cost of investible funds, and at higher interest rates, firms tend to lower investment.” |