If real GDP equals aggregate planned expenditure, then inventories
A) rise above their target levels.
B) fall below their target levels.
C) equal their target levels.
D) are either above or below their target levels depending on whether planned inventories are above or below their target levels.
E) None of the above answers is necessarily correct because there is no relationship between inventories and aggregate planned expenditure.

Question

Quizplus · Accepted Answer

When real GDP equals aggregate planned expenditure, it means that all the goods and services produced are being purchased without any excess demand or supply in the market. This also implies that firms are producing goods exactly equal to what they planned to sell, which means that their inventories are at their target levels. Therefore, the correct answer is C - inventories equal their target levels.

If Real GDP Equals Aggregate Planned Expenditure, Then Inventories