Question

State whether the following statements are true or false.
1. Consumption expenditure is the only component of aggregate demand.
2. The difference between a country's exports and imports is termed as net earnings from foreign transactions.
3. Autonomous consumption is income elastic.
4. The equality between aggregate demand and aggregate supply determines the equilibrium level of employment.
5. At breakeven point Consumption (C) is equal to income (Y).

Answer 1

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)

2) True. Net earnings from foreign transactions of a country refers to the difference between the demand for domestically produced goods and services by the rest of the world (exports) and the demand for goods and services produced abroad by the residents of that country. In other words, it is the difference between the exports and imports. That is,

Net earnings from foreign transactions = Total exports – Total imports

3) False. Autonomous consumption is that consumption which is independent of income. This is the minimum level of consumption irrespective of whether a person earns or not. Hence, it is correct to say that the autonomous consumption is income inelastic.

4) True. The equality between aggregate demand and aggregate supply determines the equilibrium level of income and prices, which in turn determine the equilibrium level of employment.

5) True. Breakeven point is a point where the consumption curve intersects the supply curve. At this point, consumption (autonomous + induced) is equal to income, accordingly, saving is equal to zero.