If planned aggregate expenditure is less than total production, then: a. the economy is in equilibrium. b. GDP will increase. c. firms will experience an unplanned increase in inventories. d. actual inventories will equal planned inventories.
Question
If planned aggregate expenditure is less than total production, then:
a. the economy is in equilibrium.
b. GDP will increase.
c. firms will experience an unplanned increase in inventories.
d. actual inventories will equal planned inventories.
Solution
The correct answer is:
c. firms will experience an unplanned increase in inventories.
Here's why:
If planned aggregate expenditure (the total amount that firms and households plan to spend on goods and services) is less than total production (the total amount of goods and services produced), then firms will end up with more goods than they can sell. This results in an unplanned increase in inventories, as firms have more stock on hand than they had planned for. This does not mean the economy is in equilibrium (option a), nor does it mean that GDP will increase (option b). It also does not mean that actual inventories will equal planned inventories (option d), as actual inventories will be higher due to the unplanned increase.
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