Income on the horizontal axis at which the vertical distance to the 45-degree line is less than the vertical distance to the Ep line gives rise to a ________ amount of unplanned inventory investment,and thus ________ pressure on output.
A)positive,upward
B)positive,downward
C)negative,upward
D)negative,downward

Question

Quizplus · Accepted Answer

The vertical distance to the 45-degree line represents the level of planned expenditure, while the vertical distance to the Ep line represents the level of actual expenditure. If the vertical distance to the Ep line is greater than the vertical distance to the 45-degree line, it indicates an unplanned increase in inventory investment, which implies that firms are producing more than consumers are buying. This leads to a decrease in output and economic pressure. Therefore, for this situation to be avoided, the vertical distance to the Ep line should be less than the vertical distance to the 45-degree line, which is only the case in option C where the sign of unplanned inventory investment is negative, causing upward pressure on output.

Income on the Horizontal Axis at Which the Vertical Distance