Which of the following would cause a decrease in aggregate demand?

• A. A rise in consumer confidence
• B. A decrease in taxes
• C. An increase in interest rates
• D. An increase in government spending

Answer: (C)

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 that factors which increase consumer spending, 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 option: a rise in consumer confidence usually increases consumption, thus increasing AD; a decrease in taxes increases disposable income, boosting consumption and AD; an increase in government spending directly increases AD.
4. Step 4: Recognize that an increase in interest rates raises the cost of borrowing, which tends to reduce investment and consumption spending, leading to a decrease in aggregate demand.
5. Step 5: Conclude that among the options, only an increase in interest rates would cause a decrease in aggregate demand because it discourages spending and investment.