Explain the relationship between real GDP and aggregate planned ...

[Brittanyd9008]

Explain the relationship between real GDP and aggregate planned expenditure, AE. What change to inventories takes place when the two are not equal?
 
  What will be an ideal response?

Question 2

A decrease in people's disposable income
 
  A) increases saving and decrease consumption.
  B) increases saving.
  C) increases investment demand.
  D) decreases saving.
  E) increases consumption.

[ttt030911]

Answer to Question 1

If the GDP and aggregate planned expenditure are equal, then there is an equilibrium. But if aggregate planned expenditure is not equal to real GDP, the economy is out of equilibrium. If aggregate planned expenditure is greater than real GDP, then households, firms, and governments plan to buy more goods and services than firms are producing. Firms meet the extra demand by allowing their inventories to decrease. The decrease is unplanned on the part of firms. So when aggregate planned expenditure exceeds real GDP, there is an unplanned decrease in inventories. Similarly, if aggregate planned expenditure is less than real GDP, households, firms, and governments plan to buy less than firms produce and so there is an unplanned increase in firms' inventories.

Answer to Question 2

D

[Brittanyd9008]

Excellent

[bitingbit]

Gracias!