If the output level is such that the aggregate expenditure line lies below the 45-degree line,which of the following is true?
A) Aggregate expenditure is greater than output,so inventories will increase and output will be raised.
B) Aggregate expenditure is greater than output,so inventories will decrease and output will be increased.
C) Aggregate expenditure is less than output,so inventories will decrease and output will be raised.
D) Aggregate expenditure is less than output,so inventories will increase and output will be lowered.
E) Aggregate expenditure is greater than output,so inventories will increase and output will be lowered.

Question

Quizplus · Accepted Answer

If the aggregate expenditure line lies below the 45-degree line, it means that aggregate expenditure is less than output. Therefore, firms will be producing more than what is being purchased and inventories will start to accumulate, leading to an increase in inventory investment. To deal with this excess inventory, firms will have to decrease their output level, leading to a decrease in overall production. Hence, option D is the correct choice.

If the Output Level Is Such That the Aggregate Expenditure