In the short-run macro model,if aggregate expenditure is less than GDP,output will
A) decline as firms cut production to stop the buildup of inventories
B) decline as firms increase their prices to stop the buildup of inventories
C) increase as firms increase production to try to stop depletion of inventories
D) increase as firms cut their prices to try to stop depletion of inventories
E) remain unchanged indefinitely unless government takes action

Question

Quizplus · Accepted Answer

If aggregate expenditure is less than GDP, it means that demand is less than supply. This will lead to an accumulation of unsold goods and inventories. To solve this problem, firms will decrease the production of goods to avoid the build-up of inventories. This reduction in production leads to a decrease in output or GDP, as firms cut production to match the reduced demand. Therefore, option A is the best choice.

In the Short-Run Macro Model,if Aggregate Expenditure Is Less Than