Difficulty: Medium Figure 13-4 -Refer to Figure 13-4. Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption, I_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 Y*, it would mean that real GDP is exceeding its equilibrium level. As a result, AE (which is equal to C + I_P) would fall short of real GDP, leading to unplanned inventory accumulations and a decrease in output in subsequent periods. Therefore, B is the correct choice. A is incorrect because AE cannot be greater than real GDP in equilibrium. C is incorrect because I_P is assumed to be autonomous, so it does not depend on the level of real GDP. D is incorrect because an excess demand for real GDP would occur if firms produced less than Y*, not more.