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 $890 billion.We can expect that
A)firms will see a decrease in inventories,and they will respond by increasing output,thereby increasing actual national income.
B)firms will decrease autonomous investment by $10 billion until equilibrium national income is reached at $890 billion.
C)firms will increase autonomous investment by $10 billion until equilibrium national income is reached at $900 billion.
D)actual national income will increase until equilibrium national income is reached at $900 billion.
E)firms will see an increase in inventories,and they will respond by decreasing output,thereby decreasing actual national income.

Question

Quizplus · Accepted Answer

In this scenario, since actual national income ($900 billion) is greater than desired consumption plus investment ($890 billion), firms will end up with excess inventory. This signals that production exceeds demand, leading firms to decrease output to adjust, which in turn decreases actual national income towards equilibrium.

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