If aggregate planned expenditure is less than real GDP then
A) firmsʹ inventories will decrease and real GDP will decrease as production falls.
B) consumers increase their planned expenditure until aggregate planned expenditure increases to equal real GDP.
C) firms increase their planned expenditure until aggregate planned expenditure increases to equal real GDP.
D) firmsʹ inventories will increase and real GDP will decrease as production falls.

Question

Quizplus · Accepted Answer

If aggregate planned expenditure is less than real GDP, it means that firms are producing more than what consumers and other firms are willing to spend on goods and services. As a result, there will be an increase in inventories as firms are not able to sell all the produced goods. To adjust to this, firms will cut back on production, which will lead to a decrease in real GDP. So, firms' inventories will increase and real GDP will decrease as production falls, as stated in option D.

If Aggregate Planned Expenditure Is Less Than Real GDP Then