If aggregate planned expenditures are less than real GDP then
A) the economy remains in disequilibrium until aggregate planned expenditures increase to the level of real GDP.
B) firms' inventories will increase and real GDP will decrease as production falls.
C) firms must increase their planned expenditures until aggregate planned expenditures increase to the level of real GDP.
D) firms' inventories will decrease and real GDP will decrease as production falls.

Question

Quizplus · Accepted Answer

If aggregate planned expenditures are less than real GDP, it means that firms are producing more than what households and businesses are willing to spend. This leads to an increase in inventories as firms are not able to sell all of their output. To reduce their inventories, firms will decrease their production which will ultimately result in a decrease in real GDP. Thus, option B is the correct choice.

If Aggregate Planned Expenditures Are Less Than Real GDP Then