Within the framework of the Keynesian model, if aggregate expenditures exceed aggregate output, then:
A) the inventories of firms would decline, and the firms would expand output in order to restore their inventories to desired levels.
B) the inventories of firms would increase, and the firms would reduce output until inventories were cut back to the desired level.
C) the current level of income would persist in the future.
D) firms would reduce their investment, and the economy would fall into a recession.

Question

Quizplus · Accepted Answer

When aggregate expenditures exceed aggregate output, it means that demand is outstripping supply. In the Keynesian framework, this situation leads firms to deplete their inventories as they sell more goods than they are producing. To replenish their inventories back to desired levels, firms would increase their output, not decrease it or maintain the current level of production. This process is part of the adjustment mechanism in the Keynesian model to equilibrate aggregate demand and supply.

Within the Framework of the Keynesian Model, If Aggregate Expenditures