Consider a simple macro model with a constant price level and demand- determined output. Suppose the level of actual national income is less than desired aggregate expenditure. In this case,
A)there will be no change in national income because only actual expenditure is relevant.
B)national income may increase or decrease, depending on the relative sizes of the average propensity to consume and the average propensity to save.
C)national income will fall, because desired expenditures are less than actual expenditures.
D)inventories will build up, causing national income to rise.
E)shortages of goods and reductions in inventories will cause producers to increase output and national income to rise.

Question

Quizplus · Accepted Answer

In this case, there is an excess supply of goods as desired expenditure is more than actual income, leading to reductions in inventories. Producers would increase output to meet the demand, leading to an increase in national income. Therefore, option E is the correct choice.

Consider a Simple Macro Model with a Constant Price Level