Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What is a major indicator of aggregate demand in an economy?

1. Total inventory of goods

2. The number of active businesses

3. Total spending by households and firms

4. The level of government interventions

The correct answer is: Total spending by households and firms

Total spending by households and firms is a major indicator of aggregate demand in an economy because it directly measures the total quantity of goods and services demanded at a given price level. In economic terms, aggregate demand encompasses the total spending on the nation’s goods and services at various price levels and includes consumption by households, investment by businesses, government spending, and net exports. When households spend money on consumer goods and services, it stimulates production, leads to job creation, and supports economic growth. Similarly, when firms invest in capital goods, they contribute to economic activity and influence the overall demand in the economy. Other options, while relevant in different contexts, do not serve as direct measures of aggregate demand. For instance, total inventory levels can indicate supply chain health or future production needs but do not necessarily reflect current demand. The number of active businesses can show economic vitality, yet it does not reveal how much they are spending or producing. Government interventions, though significant for shaping economic policy, are not a direct measure of consumer or business spending patterns and therefore do not directly indicate aggregate demand.