Question

Please answer all parts of the question. If you do them all I will give you a good rating if not I will report you. Answer like it was an exam. Do all parts please. Thank you.

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. expenditure (trillions of 2000 dollars) I5 12 45 line AE 0 3 692 Real GDP (trillions of 2000 dollars) 1) The above figure shows the AE curve and 45° line for an economy. 1) a. If real GDP equals $6 trillion, how do firms' inventories compare to their planned inventories? b. If real GDP equals $12 trillion, how do firms' inventories compare to their planned inventories? c. What is the equilibrium level of expenditure? Why is this amount the equilibrium?

Answer all parts to get good rating.

Answer 1

a.

At $6 trillion, 45 degrees line is less than the Aggregate Expenditure (AE). It shows that aggregate expenditure were too high for the firm, leading to the sale of some inventories. Thus, firms planned a certain level of inventory but the actual inventory came out to be less than the planned one. Thus, the inventories decreases. Therefore, it means that the planned investment is less than the actual investment.

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b.

On the contrary, if real GDP is $12 trillion, 45 degrees line is above the Aggregate Expenditure (AE). It shows that aggregate expenditure were less for the firm, leading to the purchase of some inventories. Thus, firms planned a certain level of inventory but the actual inventory came out to be more than the planned one. Thus, the inventories increases. Therefore, it means that the planned investment is more than the actual investment.

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c.

Finally, the equilibrium level of expenditure will be at the point where AE line intersects the 45 degrees line. In the figure, AE is equal to 45 degrees line at the point where the real GDP is $9 trillion. This point is the equilibrium point because at this point, the planned expenditure of the firm was equal to the actual expenditure and thus, firm did not purchase or sell their inventories, leading to the equilibrium.