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CA Foundation · Business Economics · Determination of National Income

In the Keynesian income-expenditure model, if planned aggregate expenditure exceeds output at a given level of income, which of the following is expected to happen?

Unplanned inventories fall and firms raise output. When planned aggregate expenditure is greater than current output, goods are sold from stock beyond what was intended, so producers expand production, and income rises until output equals planned expenditure.

  1. AUnplanned inventories rise and firms cut output
  2. BUnplanned inventories fall and firms raise outputCorrect
  3. CSaving and investment are equal so output stays unchanged
  4. DPrices fall because of excess supply of goods

Explanation

When planned expenditure exceeds output, buyers purchase more than firms produced, so stocks get depleted unintentionally. Firms respond by expanding output and employment, pushing income up toward equilibrium. Option A describes the opposite case, where output exceeds planned expenditure.

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