If prices are fixed, when aggregate planned expenditure exceeds real GDP, then
A) inventories decrease, signaling firms to increase production and increase real GDP.
B) profits fall, signaling firms to decrease production and decrease real GDP.
C) inventories increase, signaling firms to decrease production and decrease real GDP.
D) None of the above answers are correct.

Question

Quizplus · Accepted Answer

When aggregate planned expenditure exceeds real GDP, it means that demand for goods and services is greater than what the economy is producing. This results in a decrease in inventories, which signals firms to increase production to meet the demand and increase real GDP. Since prices are fixed, firms cannot increase prices to match the increase in demand, so they have to increase output to meet the demand. This is known as the Keynesian multiplier effect.

If Prices Are Fixed, When Aggregate Planned Expenditure Exceeds Real