Consider a simple macro model with a constant price level and demand-determined output.If national income is above its equilibrium level,it is likely that inventories are ________,and so national income tends to ________.
A)accumulating; rise
B)accumulating; fall
C)being depleted; rise
D)being depleted; fall
E)constant; fall

Question

Quizplus · Accepted Answer

If national income is above its equilibrium level, it suggests that firms are producing more than what consumers are demanding. As a result, inventories will start accumulating as firms are unable to sell all the output they have produced. In order to reduce inventories back to the desired level, firms will cut back on production. This reduction in production will lead to a fall in national income towards its equilibrium level. Therefore, when national income is above the equilibrium level, it is likely that inventories are accumulating and national income tends to fall.

Consider a Simple Macro Model with a Constant Price Level