Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What components make up aggregate demand?

1. Government spending and taxation only

2. Consumption, investment, government spending, and net exports

3. Foreign investment and local production only

4. Wages and salaries, interest rates, and taxes

The correct answer is: Consumption, investment, government spending, and net exports

The components that make up aggregate demand include consumption, investment, government spending, and net exports. This definition encompasses the total demand for goods and services within a particular economy at a given overall price level and in a given time period. Consumption refers to the total spending by households on goods and services. Investment reflects the spending on capital goods that will be used for future production. Government spending includes all government expenditures on goods and services that directly absorb resources. Net exports, calculated as exports minus imports, measure the value of the goods and services sold to foreign buyers versus those purchased from abroad. Together, these components contribute to the overall economic activity and help measure the health of an economy. The other options do not encapsulate the full scope of aggregate demand. Some focus narrowly on specific elements that do not represent the entire demand landscape or exclude critical components necessary for a complete understanding of aggregate demand. Thus, the correct choice reflects a comprehensive view of the key elements influencing aggregate demand in an economy.