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

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

Answer: (B)

Verified step by step guidance

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. Recall the components of aggregate demand: \(AD = C + I + G + (X - M)\), where \(C\) is consumption, \(I\) is investment, \(G\) is government spending, and \((X - M)\) is net exports.
3. Analyze how each option affects these components: an increase in government spending (\(G\)) increases AD; a rise in consumer confidence typically increases consumption (\(C\)), thus increasing AD; a decrease in taxes usually increases disposable income, boosting consumption (\(C\)) and increasing AD.
4. Focus on the effect of an increase in interest rates: higher interest rates make borrowing more expensive, which tends to reduce investment (\(I\)) and consumption financed by credit, leading to a decrease in aggregate demand.
5. Conclude that among the options, an increase in interest rates is the factor that causes a decrease in aggregate demand because it negatively impacts investment and consumption.