Suppose that there is no government and no international trade. When C + I is less than the level of real GDP
A) unplanned inventories decrease, and real GDP expands.
B) unplanned inventories increase, and real GDP contracts.
C) unplanned inventories equal zero, and there is no change in the level of real GDP.
D) real planned investment spending equals real planned saving.

Question

Quizplus · Accepted Answer

In the absence of government and international trade, C + I represents the total demand for output, and when it is less than the level of real GDP, unplanned inventories increase, indicating that firms have produced more than what is demanded. To clear these inventories, firms will reduce their production and real GDP will contract. Therefore, option B is the correct choice. Options A, C, and D are incorrect as they do not capture the impact of unplanned inventories on real GDP in this scenario.

Suppose That There Is No Government and No International Trade