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Chapter 11: Q4. (page 236)

If inventories unexpectedly rise, then production _______ sales and firms will respond by _______output.

  1. trails; expanding

  2. trails; reducing

  3. exceeds; expanding

  4. exceeds; reducing

Short Answer

Expert verified

Option (d) exceeds; reducing

Step by step solution

01

Step 1. Meaning of inventories

Inventories are the stock of final goods that are not sold and the capital goods and raw materials that help produce final goods. Firms hold inventories to match the sudden upsurge in market demand.

Although maintaining inventories is beneficial for all firms, how many inventories to keep is a crucial decision. Only an adequate amount of inventories can help firms to maximize their profits.

02

Step 2. Explanation for the answer

An unexpected boom in inventories means high production. However, the inventories cannot affect the demand. Thus, the sale remains the same. As a result, production exceeds the sales. To balance the gap between demand and supply, the firms wait for the inventories to exhaust. Therefore, they reduce production/output for some time.

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Most popular questions from this chapter

Refer to the accompanying table in answering the questions that follow:

(1) Possible Levels of Employment, Millions

(2) Real Domestic Output, Millions

(3) Aggregate Expenditures (Ca + Ig+ Xn+ G), Millions

90

\(500

\)520

100

550

560

110

600

600

120

650

640

130

700

680

  1. If full employment in this economy is 130 million, will there be an inflationary expenditure gap or a recessionary expenditure gap? What will be the consequence of this gap? By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the inflationary expenditure gap or the recessionary expenditure gap? What is the multiplier in this example?

  2. Will there be an inflationary expenditure gap or a recessionary expenditure gap if the full employment level of output is $500 billion? By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the gap? What is the multiplier in this example?

  3. Assuming that investment, net exports, and government expenditures do not change with changes in real GDP, what are the values of the MPC, the MPS, and the multiplier?

What is an investment schedule, and how does it differ from an investment demand curve?

True or False. The aggregate expenditures model assumes flexible prices.

What is Say鈥檚 law? How does it relate to the view held by classical economists that the economy generally will operate at a position on its production possibilities curve (Chapter 1)? Use production possibilities analysis to demonstrate Keynes鈥檚 view on this matter.

Assume that the consumption schedule for a private open economy is such that consumption C = 50 + 0.8Y. Assume further that planned investment Ig and net exports Xn are independent of the level of real GDP and constant at Ig = 30 and Xn = 10. Recall also that, in equilibrium, the real output produced (Y) is equal to aggregate expenditures: Y = C + Ig + Xn.

  1. Calculate the equilibrium level of income or real GDP for this economy.

  2. What happens to equilibrium Y if Ig changes to 10? What does this outcome reveal about the size of the multiplier?
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