If aggregate planned expenditure is less than real GDP,in the short run

Question

Quizplus · Accepted Answer

If aggregate planned expenditure is less than real GDP, it means that there is an unplanned increase in inventories since firms have produced more output than demanded by consumers. In the short run, firms will decrease production and decrease real GDP to reduce their inventories, causing a temporary decrease in output and employment. As a result, choice D - real GDP will decrease - is the best choice. Choices A and B are unlikely to happen since they imply an increase in aggregate planned expenditure, which contradicts the premise of the question. Choice C may occur in the long run if the decrease in real GDP leads to a decrease in the price level through the operation of the quantity theory of money, but it is not a short-run adjustment mechanism.

If Aggregate Planned Expenditure Is Less Than Real GDP,in the Short