Question : Statement 1: Changes in consumer spending affect aggregate demand.
Statement 2: Changes in labor productivity 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
Statement 1 is correct. Consumer spending is a significant component of aggregate demand. When consumers increase their spending, it leads to an increase in aggregate demand, which affects the overall level of economic activity.
Statement 2 is also correct. Labor productivity, which refers to the amount of output produced per unit of labor input, is a crucial determinant of aggregate supply. When labor productivity increases, firms can produce more output with the same amount of labor, leading to an expansion of aggregate supply.
Both statements accurately describe the relationship between consumer spending and aggregate demand, as well as labor productivity and aggregate supply.