Question : Statement 1: Changes in consumer expectations affect aggregate demand.

Statement 2: Changes in resource prices affect aggregate supply.

Which statement is correct?

Option 1: Only Statement 1
 

Option 2: Only Statement 2
   

Option 3: Both Statement 1 and Statement 2

 

Option 4: Neither Statement 1 nor Statement 2

Correct Answer: Both Statement 1 and Statement 2

Solution : The correct answer is (C) Both Statement 1 and Statement 2

Changes in consumer expectations can indeed have an impact on aggregate demand. When consumers have optimistic expectations about the future state of the economy, they are more likely to increase their current spending. This leads to an increase in aggregate demand. Conversely, if consumers become pessimistic about the future and expect a downturn in the economy, they may reduce their spending, resulting in a decrease in aggregate demand. Therefore, changes in consumer expectations can influence aggregate demand.

Changes in resource prices, such as the cost of labor, raw materials, or energy, can have a significant impact on production costs for businesses. If resource prices increase, it becomes more expensive for businesses to produce goods and services. As a result, businesses may reduce their supply at the existing price level, leading to a decrease in aggregate supply. Conversely, if resource prices decrease, it becomes cheaper to produce, and businesses may increase their supply, leading to an increase in aggregate supply. Therefore, changes in resource prices affect aggregate supply.

Both statements describe how changes in specific factors can influence either aggregate demand or aggregate supply, demonstrating their validity.