Consider a simple macro model with a constant price level and demand-determined output.Suppose the level of actual national income is less than desired aggregate expenditure.In this case,
A)inventories will build up,causing national income to rise.
B)national income will fall,because desired expenditures are less than actual expenditures.
C)shortages of goods and reductions in inventories will cause producers to increase output and national income to rise.
D)national income may increase or decrease,depending on the relative sizes of the average propensity to consume and the average propensity to save.
E)there will be no change in national income because only actual expenditure is relevant.

Question

Quizplus · Accepted Answer

If actual national income is less than desired aggregate expenditure, it means there is excess demand for goods and services. This will lead to shortages of goods and reduction in inventories. To meet the demand, producers will have to increase their output, ultimately leading to an increase in national income. Therefore, option C is correct. Option A is not correct because inventories will not build up in case of excess demand. Option B is incorrect because actual expenditures cannot be greater than desired expenditures in this case. Option D is incorrect because the question does not provide information about the average propensity to consume and save. Option E is also incorrect because excess demand will lead to an increase in national income.

Consider a Simple Macro Model with a Constant Price Level