Which of the following statements about aggregate demand (AD) is incorrect?

Question

BlackTom AI · Accepted Answer

Net exports respond to relative prices and inflation: when domestic inflation is higher than trading partners’, domestic goods become relatively more expensive, reducing exports and raising imports, so net exports change.

1) Relevant knowledge points
- Aggregate demand (AD) = C + I + G + NX (consumption + investment + government demand + net exports).
- Net exports (NX = exports − imports) depend on relative prices and exchange rates; inflation differences alter competitiveness.
- Government demand includes government consumption and public investment.
- Investment is typically the most volatile AD component; consumption is usually the largest steady component in most economies.

2) Step-by-step reasoning why option (a) is incorrect
- Start from NX = X − M. Export demand X is responsive to foreign buyers’ willingness to buy domestic goods; import demand M depends on domestic buyers’ willingness to buy foreign goods.
- If domestic inflation rises relative to partners, the domestic price level (P_dom) ↑ versus P_for. Real exchange rate and relative prices worsen for domestic producers.
- Higher relative domestic prices → domestic goods less competitive → X falls. Simultaneously, imports become relatively cheaper → M rises. Therefore NX = X − M falls.
- Conclusion: Net export demand is affected by relative inflation; the statement that it is not affected is false.

3) Illustrative numeric intuition
- Suppose originally X = 100, M = 80 → NX = 20. If domestic inflation makes exports 10% more expensive and reduces export volumes to 90 while imports rise to 88, NX = 90 − 88 = 2, a large decline.

4) Why the other options are correct
- (b) Government demand: by national accounts, includes government consumption (wages, services) and government investment (infrastructure) — correct.
- (c) Investment volatility: business investment is sensitive to interest rates, expectations and uncertainty, so it is usually the most volatile AD component — correct.
- (d) Consumption share: in most developed and many developing economies, consumption is the largest component of AD — correct.

Final confirmation: Option (a) is the incorrect statement, matching the provided answer.

Which of the following statements about aggregate demand (AD) is incorrect?单项选择题

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