Economics:
10th Edition
ISBN: 9781285859460
Author: BOYES, William
Publisher: Cengage Learning
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Question
Chapter 10, Problem 1E
To determine
The role of inventories in keeping actual expenditures equal to real
Expert Solution & Answer
Explanation of Solution
There are two situations in when the aggregate expenditures is equal to real GDP. These are
- When aggregate expenditure goes above the real GDP
- When aggregate expenditure goes below the real GDP
In the situation when aggregate expenditure goes above the real GDP, more and more goods will be bought. This would in turn encourage the companies to manufacture more goods and thus results in the increase of production of more goods, which in turn will increase the real GDP.
In the situation where aggregate expenditure goes below the real GDP, the accumulation of inventories takes place as less aggregate expenditure means less purchase of goods. This reduces the production of goods by the companies, thus reducing the real GDP.
Economics Concept Introduction
Concept Introduction:
GDP or Gross Domestic Product is defined as the monetary measure of the market value of entire final goods and services which are manufactured in period of time
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