Firms in a small economy planned that inventories would grow over the past year by $500,000.Over that year, inventories did grow by exactly $500,000.This implies that
A)aggregate expenditure that year was equal to GDP that year.
B)there was an unplanned increase in inventories that year.
C)there was an unplanned decrease in inventories that year.
D)aggregate expenditure that year was greater than GDP that year.
E)government spending grew unpredictably.

Question

Quizplus · Accepted Answer

If the firms in the small economy planned that inventories would grow over the past year by $500,000, and inventories did grow by exactly $500,000, then this means that there was no unplanned change in inventories. Therefore, planned investment equals actual investment. In a closed economy (with no net exports or imports), aggregate expenditure can be calculated as follows:

Aggregate expenditure = Consumption + Investment + Government spending

Since we are only given information about investment, we cannot determine the values of the other components of aggregate expenditure. However, we know that planned investment (which is the same as actual investment in this case) is a component of GDP (Gross Domestic Product). Therefore, if planned investment equals actual investment, then aggregate expenditure that year was equal to GDP that year.

Firms in a Small Economy Planned That Inventories Would Grow