Which of the following events would most likely reduce aggregate demand?

• A. A reduction in interest rates by the central bank
• B. A rise in exports due to a weaker domestic currency
• C. An increase in government spending on infrastructure projects
• D. A decrease in consumer confidence leading to lower household spending

Answer: (D)

Verified step by step guidance

1. Step 1: Understand that aggregate demand (AD) represents the total demand for goods and services in an economy at a given overall price level and in a given period.
2. Step 2: Recall that factors that increase consumption, investment, government spending, or net exports tend to increase aggregate demand, while factors that reduce these components tend to decrease aggregate demand.
3. Step 3: Analyze each event: a reduction in interest rates usually encourages borrowing and spending, increasing AD; a rise in exports increases net exports, raising AD; an increase in government spending directly increases AD.
4. Step 4: Recognize that a decrease in consumer confidence leads to lower household spending, which reduces consumption, a major component of aggregate demand.
5. Step 5: Conclude that among the options, the event that most likely reduces aggregate demand is the decrease in consumer confidence leading to lower household spending.