Question

If aggregate expenditures are less than real GDP, then:

both inventories and real GDP will decline.

inventories will decline but real GDP will increase.

inventories will increase and real GDP will decline.

both inventories and real GDP will increase.

inventories will increase but real GDP will remain unchanged.

Answer 1

When the planned aggregate expenditure is less than the real GDP, then it means equilibrium will not occurs becuase AE and real GDP are not equal.

Hence it means unplanned inventories will increase. Therefore when unplanned inventories will increase, then PAE and real GDP will be equal. This leads to an increase in the real GDP.

Hence it can be said that both inventories as well as Real GDP both will increase.

Hence option fourth is the correct answer.

Fourth; both inventories and real GDP will increase.