Question

Can you solve 72 with reasoning

Answer 1

Equilibrium in this model takes place when aggregate expenditure(actual demand) in the economy is intersected by the GDP(expected demand). Output level at this point is also called the effective aggregate demand in the Keynesian model.

Now when the aggregate expenditure is exceeding the GDP, firms' inventories are smaller than planned, i.e., below their target levels. Since there is an unwanted decline in the inventories, firms increase their production to build up their inventories. This raises the GDP(output), hence the employment.

Therefore the right option is B) Inventories will decline and GDP and employment will rise.