Question

State whether the following statement is true or false.

Consumption expenditure is the only component of aggregate demand.

Options

• True

• False

Answer 1

False. The components of aggregate demand include consumption, investment, government expenditure and net earnings from foreign transactions. So, as per the definition, aggregate demand consists of the following components.

Demand by households - Private consumption expenditure (C)
Demand by firms - Private investment expenditure (I)
Demand by government - Government expenditure (G)
Demand by foreign sector- Net exports (X – M)
Where, X is exports and M is imports.
Thus, AD = C + I + G + (X – M)