Suppose the economy is initially at equilibrium, in which total planned real expenditures equals real GDP. Which of the following will occur if there is an increase in autonomous investment?
A) Inventories will increase immediately and production of goods and services will decrease until real GDP catches up with total planned real expenditures.
B) Inventories will decrease immediately and production of goods and services will increase until real GDP catches up with total planned real expenditures.
C) Both inventories and production of goods and services will increase.
D) Inventories will not change and production of goods and services will not change either.

Question

Quizplus · Accepted Answer

An increase in autonomous investment will increase total planned real expenditures. Since real GDP is initially at equilibrium with total planned real expenditures, there will be a shortage of goods and services in the market. This shortage will cause inventories to decrease immediately and production of goods and services to increase until real GDP catches up with total planned real expenditures, which will restore equilibrium.

Suppose the Economy Is Initially at Equilibrium, in Which Total