Consider the following statements about changes in aggregate demand i…

Consider the following statements about changes in aggregate demand in the two-sector model:

(A) A rise in the rate of interest raises aggregate demand through higher investment.
(B) A rise in autonomous consumption raises aggregate demand at every level of income.
(C) A fall in the mpc lowers aggregate demand at every positive level of income.
(D) Easier availability of credit can raise aggregate demand through higher investment.

Which of the statements given above are correct?

Choose the correct answer from the options given below:

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → (B), (C) and (D) only

AD = C̄ + Ī + cY. It changes when C̄, c or investment changes.

(A) A rise in the rate of interest raises aggregate demand through higher investment. — Incorrect. At higher interest rates, firms lower investment, so AD falls.

(B) A rise in autonomous consumption raises aggregate demand at every level of income. — Correct. C̄ is part of AD at every income.

(C) A fall in the mpc lowers aggregate demand at every positive level of income. — Correct. A lower c makes cY smaller at every positive income.

(D) Easier availability of credit can raise aggregate demand through higher investment. — Correct. Easy credit encourages investment, which raises AD.

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.”