Suppose you observed firms' inventory stocks drop by $100 billion.If you knew that aggregate expenditure was $3,000 billion,what would GDP be?
A) $3,000 billion
B) $2,000 billion
C) $2,900 billion
D) $1,000 billion
E) $3,100 billion

Question

Quizplus · Accepted Answer

The drop in inventory stocks indicates a decrease in investment (as firms are not maintaining their usual level of inventory) and not in consumption or government spending. Therefore, we can calculate GDP using the expenditure approach: 
GDP = Aggregate Expenditure = C + I + G + NX
Since there is no information on changes in consumption, government spending, or net exports, we can assume they remain constant. Therefore:
$3,000 billion = C + I + G + NX
$3,000 billion = C + ($I_{initial}$ - $100$ billion) + G + NX
$3,000 billion = C + $I_{initial}$ - $100$ billion + G + NX
Solving for GDP:
GDP = C + $I_{initial}$ + G + NX - $100$ billion
GDP = Aggregate Expenditure - $100$ billion
GDP = $3,000$ billion - $100$ billion
GDP = $2,900$ billion.

Suppose You Observed Firms' Inventory Stocks Drop by $100 Billion