Question

The following table shows some information on a hypothetical economy. The table lists real GDP, consumption (C), investment (I), government spending (G), net exports (X – M), and aggregate expenditures (AE). In this problem, assume that investment, government spending, and net exports are independent of the economy's real GDP level.

Real GDP	C	I	G	X – M	AE	Unplanned Inventory Investment	Direction of Real GDP and Employment
$400	$300	$50	$100	$0		-$50
$500		$50	$100	$0	$500	$0
$600	$400	$50	$100	$0		$50
$700		$50	$100	$0	$600	$100
	$500	$50	$100	$0	$650	$150

Using the numbers provided in the table, enter the correct numbers in the empty cells. Then, using the dropdown selection menus in the right-most column, indicate whether output will tend to increase, decrease, or remain in equilibrium at each level of real GDP in the table. (Note: The table uses negative numbers to indicate an unplanned inventory investment depletion and positive numbers to indicate an unplanned inventory investment accumulation.)

True or False: The most fundamental assumption behind the aggregate expenditures model is that prices in the economy are flexible.

When aggregate expenditures are greater than real GDP, there is an unplanned inventory investment ______ . This will prompt firms to _______ employment and production.

( Increase or decrease options for both underlines )

Answer 1

The most fundamental assumption behind the aggregate expenditures model is that prices in the economy are flexible.

When aggregate expenditures are greater than real GDP, there is an unplanned inventory investment decreases. This will prompt firms to increase employment and production.

reason: As expenditure is less than real GDP means that people are spending or demanding more than the suppliers are investing or supplying. This means that firms' unplanned investment in inventory decreases as their inventory gets sold out fast and demand being greater than supply induces firms to produce more for which they increase employment and production.