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Exhibit: Aggregate Expenditures (AE) in a Simplified Economy

-(Exhibit: Aggregate Expenditures (AE) in a Simplified Economy) Consider a simple economy that is made up of only two sectors, households and firms, and that investment is autonomous. Further, disposable personal income = real GDP. Suppose that actual real GDP in this economy is $300 billion in a particular period. We would expect to see
A) unintended reductions in inventory, planned investment will exceed actual investment.
B) unintended reductions in inventory, planned investment will be less than actual investment.
C) unintended increases in inventory, planned investment will exceed actual investment.
D) unintended increases in inventory, planned investment will be less than actual investment.

Question

Use the following to answer questions .
Exhibit: Aggregate Expenditures (AE) in a Simplified Economy
 
-(Exhibit: Aggregate Expenditures (AE) in a Simplified Economy) Consider a simple economy that is made up of only two sectors, households and firms, and that investment is autonomous. Further, disposable personal income = real GDP. Suppose that actual real GDP in this economy is $300 billion in a particular period. We would expect to see
A) unintended reductions in inventory, planned investment will exceed actual investment. 
B) unintended reductions in inventory, planned investment will be less than actual investment. 
C) unintended increases in inventory, planned investment will exceed actual investment. 
D) unintended increases in inventory, planned investment will be less than actual investment.

Quizplus · Accepted Answer

Unintended reductions in inventory occur when actual real GDP exceeds planned aggregate expenditures. In this case, actual real GDP is $300 billion, and planned aggregate expenditures are less than $300 billion (since planned investment is less than actual investment). Therefore, there will be unintended reductions in inventory.

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