Which of the following is/are true about aggregate demand?
I. An increase in the real rates of interest increases current demand.
II. An increased optimism about the future direction of the economy will increase current demand.
III. An increase in the expected future inflation rate increases current demand.
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A. B. C. D.A
An increase in real interest rates makes current consumption more expensive in terms of opportunity cost. Hence, when real rates rise, current demand falls. On the other hand, if future inflation is expected to be high, then consumers want to buy goods in the current period, raising aggregate demand. Similarly, if they expect the future to be prosperous, they will spend some of that expected future income on current consumption. Hence, both higher expected future inflation and future wealth will increase current demand.