Correct Answer: Both Statement 1 and Statement 2

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

1. 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, as more goods and services are being demanded in the economy. Conversely, if consumer spending decreases, it results in a decrease in aggregate demand.

2. Statement 2 is also correct. Input prices, such as the cost of labor, raw materials, or energy, directly impact the cost of production for businesses. When input prices rise, 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 input prices decrease, businesses may increase their supply, leading to an increase in aggregate supply.

Both statements accurately describe how changes in consumer spending and input prices can influence aggregate demand and aggregate supply, respectively.