In the aggregate expenditure (AE) model, when real GDP exceeds aggregate planned expenditure, actual inventories ________ planned inventories and real GDP ________.
A) exceed; increases
B) exceed; decreases
C) are less than; increases
D) are less than; decreases
E) exceed; does not change

Question

Quizplus · Accepted Answer

If real GDP exceeds aggregate planned expenditure, it means that there is an unplanned increase in inventories. This leads to the actual inventories exceeding planned inventories (B), as firms have produced more output than they originally planned to sell. To bring inventories back in line with planned levels, firms will need to decrease production and decrease GDP (B).

In the Aggregate Expenditure (AE) Model, When Real GDP Exceeds