Which of the following factors can increase aggregate demand?

• A. Increased taxation
• B. Decreased consumer confidence
• C. Increased government spending
• D. Higher interest rates

Answer: (C)

The factor that can increase aggregate demand is increased government spending. When the government increases its expenditures, it directly boosts overall demand in the economy by purchasing goods and services, which can lead to higher employment and income levels. This additional income often translates into increased consumption by households, further amplifying the overall demand.

Increased government spending can be particularly effective during periods of economic downturn when private sector demand is insufficient to stimulate growth. By stepping in and spending on infrastructure, education, or other public goods, the government can directly enhance aggregate demand, leading to a multiplier effect as those employed in these projects spend their earnings.

On the other hand, increased taxation can reduce disposable income for consumers and businesses, potentially leading to decreased consumption and investment. Decreased consumer confidence typically results in reduced spending as households become more cautious about their financial situations, negatively impacting aggregate demand. Lastly, higher interest rates discourage borrowing and spending, which can also lead to a decline in aggregate demand.