Chapter 19: Problem 2

There will be unplanned inventory investment accumulation when a. aggregate output (real GDP) equals aggregate expenditures. b. aggregate output (real GDP) exceeds aggregate expenditures. c. aggregate expenditures exceed aggregate output (real GDP). d. firms increase output.

Short Answer

Expert verified

In conclusion, there will be unplanned inventory investment accumulation when: b. aggregate output (real GDP) exceeds aggregate expenditures.

Step by step solution

Unplanned Inventory Investment Accumulation

Unplanned inventory investment occurs when firms produce more goods than they sell or when they sell fewer goods than they produce. This leads to an unexpected change in the level of inventories (stocks of goods).

Aggregate Output (Real GDP)

Aggregate output, also known as real gross domestic product (GDP), is the total value of all goods and services produced within an economy during a specific period of time. It serves as a measure of a country's overall economic activity.

Aggregate Expenditures

Aggregate expenditures refer to the total amount of spending on consumption, investment, government purchases, and net exports within an economy. It helps determine the overall demand for goods and services. Step 2: Understanding the Relationship

Relationship between Aggregate Output, Aggregate Expenditures, and Unplanned Inventory Investment

There will be unplanned inventory investment accumulation when the aggregate output (real GDP) does not match aggregate expenditures. If aggregate output exceeds aggregate expenditures, firms will have produced more goods than what was demanded, resulting in unsold goods and unplanned inventory accumulation. Conversely, if aggregate expenditures exceed aggregate output, firms sold more goods than they produced, which would lead to a drawdown in inventory rather than an accumulation. Step 3: Analyzing the Options

Option (a)

In this situation, aggregate output (real GDP) equals aggregate expenditures, which means the supply of goods and services is exactly equal to the demand for goods and services. As a result, there is no unplanned inventory investment accumulation. Therefore, this option is not correct.

Option (b)

Here, aggregate output (real GDP) exceeds aggregate expenditures, meaning more goods have been produced than demanded. This excess of supply will lead to an accumulation of inventories or stock that was not planned. Thus, option (b) is the correct answer.

Option (c)

In this case, aggregate expenditures exceed aggregate output (real GDP), which refers to a situation where the demand for goods and services is higher than the supply. As a result, there won't be any unplanned inventory investment accumulation. Instead, firms will draw from their existing inventories. Hence, this option is incorrect.

Option (d)

The increase in output does not necessarily lead to unplanned inventory investment accumulation. It could be possible that the increase in output comes with a corresponding increase in demand (aggregate expenditures). Thus, this option is also not correct. In conclusion, there will be unplanned inventory investment accumulation when: b. aggregate output (real GDP) exceeds aggregate expenditures.

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