The figure shows planned aggregate expenditure and output for an economy. If output in this economy is Y₃, we would expect there to be: A) a decrease in inventories. B) an increase in inventories. C) no change in inventories. D) an increase in consumption spending.

Question

Quizplus · Accepted Answer

When output in the economy is at Y₃, it is above planned aggregate expenditure. This means that firms are producing more than what is being demanded at the current price level. This would lead to an unplanned accumulation of inventories, as firms are producing more goods than consumers are purchasing. Therefore, we would expect an increase in inventories.

The Figure Shows Planned Aggregate Expenditure and Output for an Economy