The assumption that aggregate demand determines output is reasonable because
A) firms generally operate with some excess capacity.
B) firms usually maintain a supply of inventories.
C) the natural rate of unemployment is between 5 and 6 percent.
D) all of the above.
E) none of the above.

Question

Quizplus · Accepted Answer

The assumption that aggregate demand determines output is reasonable for several reasons: firms often operate with excess capacity, allowing them to increase production when demand rises; firms maintain inventories that can be sold to meet unexpected demand; and the natural rate of unemployment does not contradict the idea that demand can drive output, as it reflects structural and frictional unemployment rather than demand-driven cyclical unemployment.

The Assumption That Aggregate Demand Determines Output Is Reasonable Because