When firms reduce their target level of inventories, equilibrium expenditure _______ and real GDP _______.
A)decreases; increases
B)decreases; does not change
C)increases; increases
D)decreases; decreases
E)increases; decreases

Question

Quizplus · Accepted Answer

When firms reduce their target level of inventories, it implies they are cutting back on production due to anticipated lower demand or sales. This reduction in production leads to a decrease in equilibrium expenditure as there is less spending in the economy. Consequently, real GDP also decreases because the total output of goods and services in the economy falls.

When Firms Reduce Their Target Level of Inventories, Equilibrium Expenditure