Difficulty: Medium Figure 13-4 -Refer to Figure 13-4. Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, JI_P = Planned Investment and Y* = equilibrium real GDP. Suppose AE = C + I_P, I_P is autonomous and the consumption function is C = $1,000 billion + 0.5Y. If firms produced a real GDP greater than the Y*, A) AE would be greater than real GDP. B) AE would fall short of real GDP. C) actual investment would be less than I_P. D) there would be an excess demand for real GDP.

Question

Quizplus · Accepted Answer

If firms produced a real GDP greater than the equilibrium level (Y*), it means that actual GDP is greater than planned or desired GDP. This implies that aggregate expenditures would fall short of actual GDP (AE < Y), as unplanned inventory build-up occurs, and firms reduce their production to align their output with the demand. Therefore, B is the correct answer. The level of autonomous investment (I_P) does not change with the level of real GDP, so C is incorrect. Excess demand for real GDP would occur if AE > Y, which is not the case here, so D is also incorrect.