Consider the simplest macro model with demand- determined output, where AE = C + I. Suppose that actual national income is $900 billion and desired consumption plus desired investment is $890 billion. We can expect that
A)firms will see an increase in inventories, and they will respond by decreasing output, thereby decreasing actual national income.
B)firms will see a decrease in inventories, and they will respond by increasing output, thereby increasing actual national income.
C)firms will decrease autonomous investment by $10 billion until equilibrium national income is reached at $890 billion.
D)actual national income will increase until equilibrium national income is reached at $900 billion.
E)firms will increase autonomous investment by $10 billion until equilibrium national income is reached at $900 billion.

Question

Quizplus · Accepted Answer

When actual national income ($900 billion) is greater than desired consumption plus investment ($890 billion), firms will experience an unplanned increase in inventories, leading them to reduce output, which will decrease actual national income.

Consider the Simplest Macro Model with Demand- Determined Output, Where