When PAE is less than Y, firms will:
A) decrease production.
B) increase production.
C) make no change in production.
D) increase labor.

Question

Quizplus · Accepted Answer

When PAE (planned aggregate expenditure) is less than Y (potential output), there is excess capacity in the economy, indicating weak demand for goods and services. Therefore, firms may decrease production to reduce inventories and avoid incurring costs.

When PAE Is Less Than Y, Firms Will