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)being depleted; fall
B)being depleted; rise
C)accumulating; rise
D)constant: fall
E)accumulating; fall

Question

Quizplus · Accepted Answer

If national income is above its equilibrium level, it means that aggregate demand (AD) is higher than aggregate supply (AS). This results in firms selling more than they are producing, which means that their inventories will start to decline. To meet the higher demand, firms will increase production, which leads to an increase in national income. However, if inventories are being depleted, eventually firms will not be able to keep up with the higher demand, and national income will start to fall. Therefore, the best choice is E, which means that when national income is above its equilibrium level, inventories are accumulating, but eventually, they will start to deplete, and national income will fall.

Consider a Simple Macro Model with a Constant Price Level