If prices are fixed, when aggregate planned expenditure exceeds real GDP, then
A) inventories increase, signaling firms to decrease production and decrease real GDP.
B) inventories decrease, signaling firms to increase production and increase real GDP.
C) profits fall, signaling firms to decrease production and decrease real GDP.
D) None of the above answers are correct.

Question

Quizplus · Accepted Answer

If aggregate planned expenditure exceeds real GDP, it means that the demand for goods and services is higher than the current supply. As a result, firms will notice a decrease in their inventories as they sell out their existing stock. This will signal them to increase production in order to meet the demand and keep their inventories at adequate levels. This increase in production will lead to an increase in real GDP.

If Prices Are Fixed, When Aggregate Planned Expenditure Exceeds Real