Question

You are looking at an aggregate expenditure line (C + I + G + X-M). Spending is $15 Trillion. Real GDP (output) is $15.2 Trillion. Identify the accurate statement or statements regarding this scenario.

Select one:

a. the amount produced exceeds the amount people want to spend

b. inventories begin to increase, (unsold goods accumulate)

c. firms cut production, reducing employment and income

d. all of the statements above are accurate

Answer 1

AE=C+I+G+X-M

When aggregate expenditure is greater than real GDP, then inventory will increase and real GDP will decrease until it reaches to equilibrium level of GDP.

So when aggregate expenditure is $15 Trillion and Real GDP (output) is $15.2 Trillion. It means that the amount produced exceeds the amount people want to spend, inventories begin to increase, (unsold goods accumulate) and firms cut production, reducing employment and income.

The inventory will increase because output (real GDP) is greater than the aggregate expenditure, so unsold inventory continue to accumulate.

Since there is unsold inventory, so firm cuts production till AE and real GDP becomes equal. SO in this process employment and income both decreases.

So it means first three option are correct.

Hence option d is the correct answer.