Consider the simplest macro model with demand-determined output.If desired aggregate expenditure is greater than actual national income,then
A)inventories will likely begin to fall,causing firms to increase production.
B)actual national income must be less than the equilibrium level.
C)actual national income must be greater than the equilibrium level.
D)inventories will likely begin to rise,causing firms to reduce production.
E)both A and B are correct.

Question

Quizplus · Accepted Answer

When desired aggregate expenditure is greater than actual national income, it indicates that consumers and businesses are willing to spend more than the economy is currently producing. This leads to a decrease in inventories as firms have not produced enough to meet demand, prompting them to increase production to replenish their stocks and meet the higher demand. This situation also means that the actual national income is below the equilibrium level, where aggregate expenditure equals output, necessitating an adjustment towards equilibrium through increased production.

Consider the Simplest Macro Model with Demand-Determined Output