The economy is in equilibrium,TP = TE.Then,net exports fall.As a result,the __________ curve shifts __________,inventory levels unexpectedly __________,and business firms __________ the quantity of good and services they produce.
A) TE; upward; rise; increase
B) TP; rightward; rise; decrease
C) TE; downward; rise; decrease
D) TE; downward; rise; increase
E) none of the above

Question

Quizplus · Accepted Answer

Since net exports have fallen, there is a decrease in the total spending in the economy. This leads to a decrease in TE (total expenditure) as well. As a result, the aggregate demand (AD) curve will shift downwards. The unexpected increase in inventory levels suggests that production levels are higher than demand, so firms will reduce production in response (which results in a decrease in the quantity of goods and services produced). Finally, the TP (total production) curve remains the same, as the economy is still in equilibrium, but at a lower level of output.

The Economy Is in Equilibrium,TP = TE