The figure shows planned aggregate expenditure and output for an economy. If output in this economy is Y₃, we would expect there to be _______ in production because PAE is _______ actual output. A) an increase; less than B) an increase; greater than C) no change; equal to D) a decrease; less than

Question

Quizplus · Accepted Answer

The point where planned aggregate expenditure (PAE) intersects the 45-degree line represents the level of actual output in the economy. When output is at Y₃, we can see that PAE is less than actual output, which would lead to an increase in inventories and a decrease in production to reach equilibrium. Therefore, the correct answer is D, a decrease in production because PAE is less than actual output.

The Figure Shows Planned Aggregate Expenditure and Output for an Economy