Question

Please explain in 3 or more sentences if its:

True false or uncertain

1)The accumulation of unplanned inventories causes aggregate output to increase.

2)In an aggregate expenditure model with no government or foreign sectors, represented by C = a + bY and I (where a and I are autonomous amounts), an increase in the marginal propensity to consume (b) causes the multiplier to rise.

Answer 1

a) "False"

Unplanned inventories will only accumulate when the aggregate demand is low and the firms are not able to sell their goods in the market due to low demand. In the coming period they will decrease the output to finish the inventory and that will decrease the output. Increases in the unplanned inventory always lead to a fall In the demand.

b) "True"

The multiplier is directly related to the marginal propensity to consume. If the MPC rises the multiplier will rise and vice versa.