Use the following figure to answer the questions : Figure9.9

-If the economy depicted in Figure 9.9 produced at a full-employment output level of $50 billion instead of the equilibrium output level,inventory levels would
A)Increase by $50 billion.
B)Increase by $25 billion.
C)Decrease by $25 billion.
D)Decrease by $50 billion.

Question

Use the following figure to  answer the questions : Figure9.9
 
-If the economy depicted in Figure 9.9 produced at a full-employment output level of $50 billion instead of the equilibrium output level,inventory levels would
A)Increase by $50 billion. 
B)Increase by $25 billion. 
C)Decrease by $25 billion. 
D)Decrease by $50 billion.

Quizplus · Accepted Answer

At the full-employment output level of $50 billion, the aggregate demand curve intersects the 45-degree line at a point below the potential GDP line, which means that there will be a decrease in inventories. Specifically, inventories will decrease by the difference between potential GDP and actual GDP, which is $25 billion ($50 billion - $25 billion). Therefore, the correct answer is C.

Use the Following Figure to Answer the Questions