38) When aggregate planned expenditure is less than GDP,
A) firms increase production until the economy reaches equilibrium expenditure.
B) firms decrease production until the economy reaches equilibrium expenditure.
C) the economy might be at its equilibrium expenditure and if it is, firms do not change their production.
D) the economy definitely is at its equilibrium expenditure and firms do not change production.
E) the economy definitely is at its equilibrium expenditure but even so, firms decrease production.
39) If real GDP exceeds aggregate planned expenditure, then the change in unplanned inventories is and firms production.
A) positive; increase
B) positive; decrease
C) negative; increase
D) negative; decrease
E) zero; do not change
40) When aggregate planned expenditure real GDP, there are unplanned in inventories, and firms __ production, therefore decreasing real GDP.
A) is less than; increases; decrease
B) exceeds; decreases; decrease
C) is less than; increases; increase
D) exceeds; increases; increase
E) is less than; decreases; decrease
41) If aggregate planned expenditures are less than real GDP, then
A) inventories increase above their planned levels and businesses decrease their production.
B) inventories decrease below their planned levels and businesses increase their production.
C) there is no equilibrium level of real GDP.
D) inventories increase above their planned levels and businesses increase their production.
E) unplanned inventory changes equal zero.
42) When real GDP exceeds aggregate planned expenditure
A) firms increase production.
B) real GDP increases.
C) an unplanned decrease in inventories occurs.
D) an unplanned increase in inventories occurs.
E) real GDP remains at its equilibrium.
43) When GDP = $2.5 trillion, C = $1.0 trillion, I = $0.6 trillion, G = $0.4 trillion, and NX = $0. Then
A) unplanned inventory change = $0.5 trillion.
B) aggregate planned expenditure = $2.5 trillion.
C) aggregate planned expenditure = $1.6 trillion.
D) unplanned inventory change = -$0.5 trillion.
E) equilibrium expenditure = $2.0 trillion.
44) Which of the following situations leads to an unplanned increase in inventories of $2.0 trillion?
A) real GDP = $5.0 trillion and aggregate planned expenditures = $7.0 trillion
B) real GDP = $5.0 trillion and aggregate planned expenditures = $5.0 trillion
C) real GDP = $6.0 trillion and aggregate planned expenditures = $4.0 trillion
D) real GDP = $8.0 trillion and aggregate planned expenditures = $5.0 trillion
E) More information is needed about planned investment and actual investment.
45) Points where the aggregate expenditure (AE) curve lie above the 45° line are points where aggregate planned expenditure is
A) greater than real GDP.
B) less than real GDP.
C) equal to real GDP.
D) the inverse of real GDP.
E) not related to real GDP.
46) If aggregate planned expenditure is greater than GDP, then
A) inventory investment is smaller than planned.
B) inventory investment is larger than planned.
C) production is too high.
D) a recession will result.
E) the consumption function will shift downward to restore the equilibrium.
47) When aggregate planned expenditure exceeds real GDP,
A) firms decrease production.
B) real GDP decreases.
C) an unplanned decrease in inventories occurs.
D) an unplanned increase in inventories occurs.
E) real GDP remains at its equilibrium level.
The Correct Answer and Explanation is :
Correct Answers:
38) B) firms decrease production until the economy reaches equilibrium expenditure.
39) B) positive; decrease
40) A) is less than; increases; decrease
41) A) inventories increase above their planned levels and businesses decrease their production.
42) D) an unplanned increase in inventories occurs.
43) A) unplanned inventory change = $0.5 trillion.
44) D) real GDP = $8.0 trillion and aggregate planned expenditures = $5.0 trillion.
45) A) greater than real GDP.
46) A) inventory investment is smaller than planned.
47) C) an unplanned decrease in inventories occurs.
Explanation:
In macroeconomics, aggregate planned expenditure (AE) represents the total spending on an economy’s output, while Gross Domestic Product (GDP) represents the total value of goods and services produced. When there is a mismatch between these two, economic adjustments occur.
- When AE is less than GDP, businesses produce more than what is being demanded, leading to an unplanned increase in inventories. Firms will respond by reducing production, moving the economy toward equilibrium (Question 38, 40, 41, 42).
- When real GDP exceeds AE, firms experience an increase in unplanned inventories (excess supply). This signals them to cut production in order to avoid further unsold goods (Question 39).
- Conversely, when AE exceeds GDP, there is an unplanned depletion of inventories as firms are selling more than they are producing. This leads to an increase in production to restock inventories (Question 47).
- Regarding inventory investment, if AE is greater than GDP, firms experience lower than planned inventory investment because goods are selling quickly (Question 46).
- Graphically, points where the AE curve lies above the 45° line indicate that AE is greater than GDP, implying that production must increase to meet demand (Question 45).
- In numerical scenarios, unplanned inventory changes occur when the difference between GDP and AE is not zero (Question 43, 44).
Understanding these relationships helps predict economic fluctuations and business cycles. When firms adjust production, GDP moves toward equilibrium expenditure, stabilizing the economy over time.