Question

In: Economics

Consider the aggregate expenditure, fixed price model. If the economy just had a strong increase in...

Consider the aggregate expenditure, fixed price model. If the economy just had a strong increase in production, what can we say was the situation with respect to inventories or investment or wages in the previous period?

Select one:

a. Firms were increasing production due to an unexpected increase in inventories.

b. Firms were increasing production due to an unexpected decrease in inventories.

c. Firms were increasing production due to an unexpected increase in investment.

d. Firms were increasing production due to an unexpected decrease in wages.

Solutions

Expert Solution

Answer is “Firms were increasing production due to an unexpected decrease in inventories.”

If the economy had a strong increase in production , then it reflects increase in Real GDP. Higher real GDP means increase in production of goods and services. The Real GDP will continue to rise until it equals Aggregate Expenditure, where unplanned inventory will be zero.

Rahul Sunny answered 2 years ago
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