Increasing which of the following will cause an increase in aggregate demand?

• A. Government spending
• B. Taxes
• C. Interest rates
• D. Imports

Answer: (A)

Verified step by step guidance

1. Step 1: Understand that aggregate demand (AD) represents the total quantity of goods and services demanded across all levels of an economy at a given overall price level and in a given period.
2. Step 2: Recall the components of aggregate demand, which are given by the formula: \(AD = C + I + G + (X - M)\), where \(C\) is consumption, \(I\) is investment, \(G\) is government spending, \(X\) is exports, and \(M\) is imports.
3. Step 3: Analyze how each option affects aggregate demand: Increasing government spending (\(G\)) directly increases aggregate demand because it is a component of AD.
4. Step 4: Consider taxes: Increasing taxes generally reduces disposable income, which tends to decrease consumption (\(C\)), thus lowering aggregate demand.
5. Step 5: Evaluate interest rates and imports: Higher interest rates usually reduce investment (\(I\)) and consumption, lowering AD; increasing imports (\(M\)) increases the subtraction term \((X - M)\), which reduces aggregate demand.