Consider the simplest macro model with demand-determined output,where AE = C + I.Suppose actual national income is $900 billion and desired consumption plus desired investment is $920 billion.We can expect that
A)firms will see an increase in inventories,and they will respond by decreasing output,thereby decreasing actual national income.
B)firms will decrease autonomous investment by $20 billion until equilibrium national income is reached at $900 billion.
C)firms will increase autonomous investment by $20 billion until equilibrium national income is reached at $920 billion.
D)firms will see a decrease in inventories,and they will respond by increasing output,thereby increasing actual national income.
E)actual national income will decrease until equilibrium national income is reached at $900 billion.

Question

Quizplus · Accepted Answer

In this scenario, since desired consumption plus investment ($920 billion) exceeds actual national income ($900 billion), firms will experience a decrease in inventories as demand outstrips supply. This will lead them to increase production (output) to meet the higher demand, thereby increasing actual national income towards the equilibrium level of $920 billion.

Consider the Simplest Macro Model with Demand-Determined Output,where AE =