If actual aggregate expenditure equals aggregate planned expenditure, then
A) there is never any change in firms’ inventories.
B) unplanned inventory changes are positive.
C) firms obtain the desired change in their inventories.
D) unplanned inventory changes are negative.
E) actual aggregate expenditure might be greater than, equal to, or less than real GDP.
The correct answer and explanation is :
The correct answer is A) there is never any change in firms’ inventories.
Explanation:
The relationship between actual aggregate expenditure and aggregate planned expenditure is critical in understanding the behavior of firms’ inventories in the economy.
- Aggregate expenditure refers to the total spending in the economy, including consumption, investment, government spending, and net exports (exports minus imports). Planned expenditure is the amount of spending that firms and households intend to make. When actual aggregate expenditure equals planned aggregate expenditure, it means that the total spending in the economy is exactly as planned.
- Firms’ inventories represent goods that have been produced but not yet sold. Firms plan their production based on expected demand, but in reality, demand can vary, leading to unplanned changes in inventory. If the actual expenditure is greater than the planned expenditure, firms will find themselves selling more than expected, leading to a depletion of inventories. If the actual expenditure is less than planned, firms will accumulate more inventory than anticipated.
- When actual aggregate expenditure equals aggregate planned expenditure, this equilibrium condition indicates that the total output (or real GDP) in the economy matches what was expected to be spent. In this case, firms are selling exactly what they planned to sell, so there is no unplanned change in their inventories. This is why A) there is never any change in firms’ inventories is the correct answer.
- For the other options:
- B) is incorrect because unplanned inventory changes only happen when actual expenditure differs from planned expenditure.
- C) is incorrect because the desired change in inventories corresponds to when actual expenditure exceeds or falls short of planned expenditure, but in equilibrium, there is no change in inventories.
- D) is incorrect because negative unplanned inventory changes happen when actual expenditure exceeds planned expenditure.
- E) is incorrect because in equilibrium, actual and planned expenditures are equal, meaning actual expenditure cannot be greater or less than real GDP.
Thus, the equilibrium where actual aggregate expenditure equals planned aggregate expenditure ensures there is no change in inventories.