Assume that aggregate expenditures are greater than real GDP. What will happen to unplanned inventories? What...

Assume that aggregate expenditures are greater than real GDP.
1. What will happen to unplanned inventories?
2. What will happen to actual investment?
3. What will happen to production and employment levels in the next period?

Expert Solution

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a. If aggregate expenditure is greater than the real GDP then there will exist no unplanned inventories. Infact, the economy will have higher demand than dupply which will mean that not enough goods and services are available in the economy to fulfill present needs. This may consequently result in an increase in price.

b. We know that investment is part of aggregate expenditure and as a result this will mean that a higher aggregate expenditure will result in higher investment. However due to a lack of supply in the market to reach equilibrium, price levels will rise and to offset this change the monetary authority will increase the interest rates in the economy which will then result in lowering of the investment.

c. The production and employments will see a fall in the next period due to the rise in prices as individuals will not be able to purchase all the goods and services in the economy which will result in a hamper of the circular flow of income. Higher price will lead to lower purchases which will inturn reduce sales and consequently require firms to reduce output and layoff workers. This will result in higher levels of unemployment.

Rahul Sunny answered 1 year ago

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