21) When aggregate expenditure is more than GDP, which of the following is true?
A) There was an unplanned decrease in inventories.
B) Firms spent less on capital goods than they planned.
C) Households bought fewer new homes than they planned.
D) All of the above must be true when aggregate expenditure is more than GDP.
22) In a small economy in 2013, aggregate expenditure was $800 million while GDP that year was $850 million. Which of the following can explain the difference between aggregate expenditure and GDP that year?
A) Aggregate expenditure is always less than GDP in developed countries.
B) Firm investment in inventories was less than anticipated in 2013.
C) Firm investment in inventories was greater than anticipated in 2013.
D) Aggregate expenditure is always less than GDP in developing countries.
23) Firms in a small economy planned that inventories would grow over the past year by $300,000. Over that year, inventories actually grew by $400,000. This implies that
A) aggregate expenditure that year was less than GDP that year.
B) there was an unplanned decrease in inventories that year.
C) there was a planned decrease in inventories that year.
D) aggregate expenditure that year was equal to GDP that year.
24) Firms in a small economy planned that inventories would grow over the past year by $500,000. Over that year, inventories did grow by exactly $500,000. This implies that
A) aggregate expenditure that year was equal to GDP that year.
B) there was an unplanned increase in inventories that year.
C) there was an unplanned decrease in inventories that year.
D) aggregate expenditure that year was greater than GDP that year.
25) If aggregate expenditure is less than GDP, how will the economy reach macroeconomic equilibrium?
A) Inventories will decline, and GDP and employment will decline.
B) Inventories will rise, and GDP and employment will decline.
C) Inventories will decline, and GDP and employment will rise.
D) Inventories will rise, and GDP and employment will rise.
26) If firms find that consumers are purchasing more than expected, which of the following would you expect?
A) Aggregate expenditure will likely be greater than GDP.
B) Aggregate expenditure will likely be less than GDP.
C) The economy will adjust to macroeconomic equilibrium as inventories rise, and production and employment fall.
D) The economy will adjust to macroeconomic equilibrium as inventories fall, and production and employment fall.
27) If firms sell exactly what they expected to sell, all of the following will be true except
A) aggregate expenditure will be greater than GDP.
B) there is no unplanned change in inventories.
C) inventories will not change, and GDP and employment will remain stable.
D) aggregate expenditure will be equal to GDP.
28) If economists forecast a decrease in aggregate expenditure, which of the following is likely to occur?
A) GDP will rise.
B) GDP will fall.
C) Wages will rise.
D) Inventories will fall.
29) The __ model focuses on the relationship between total spending and real GDP in the short run, assuming the price level is constant.
A) supply and demand
B) national income
C) aggregate expenditure
D) business cycle
30) Intel is the world’s largest semiconductor manufacturer and a major supplier of the microprocessors and memory chips found in most personal computers. During the recession of 2007-2009, Intel’s revenues and it the size of its workforce.
A) fell; increased
B) fell; decreased
C) rose; increased
D) rose; decreased
The Correct Answer and Explanation is :
Here are the correct answers along with explanations:
Correct Answers:
21) A) There was an unplanned decrease in inventories.
22) C) Firm investment in inventories was greater than anticipated in 2013.
23) A) Aggregate expenditure that year was less than GDP that year.
24) A) Aggregate expenditure that year was equal to GDP that year.
25) B) Inventories will rise, and GDP and employment will decline.
26) A) Aggregate expenditure will likely be greater than GDP.
27) A) Aggregate expenditure will be greater than GDP.
28) B) GDP will fall.
29) C) Aggregate expenditure.
30) B) Fell; decreased.
Explanation:
- Question 21: If aggregate expenditure (AE) exceeds GDP, firms sell more than expected. This reduces inventories unexpectedly, leading to an unplanned decrease in inventories.
- Question 22: If AE is lower than GDP, firms produced more than what was sold. This means inventories increased more than planned, so firm investment in inventories was greater than anticipated.
- Question 23: Since inventories increased more than firms planned, it implies that firms sold less than expected, meaning AE was less than GDP.
- Question 24: When inventories grew exactly as planned, no unplanned inventory changes occurred, meaning AE was equal to GDP.
- Question 25: If AE is lower than GDP, firms accumulate unsold goods (rising inventories), leading to a decline in production and employment.
- Question 26: When consumers buy more than expected, firms experience an unplanned inventory drop, meaning AE exceeds GDP.
- Question 27: If firms sell exactly what they expected, there are no unplanned inventory changes, meaning AE = GDP, making option (A) incorrect.
- Question 28: Lower AE means lower demand, leading to falling GDP as firms cut production.
- Question 29: The aggregate expenditure model examines short-term GDP changes by assuming constant prices.
- Question 30: During the 2007-2009 recession, Intel’s revenue fell, leading them to reduce their workforce due to lower demand for technology products.
This analysis highlights the connection between aggregate expenditure, GDP, and inventory changes, which are key factors in understanding macroeconomic equilibrium.