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Assignment 5 - A5-6 Statement A5-6 is true This is because...

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Assignment 5 A5-3 Statement A5-3 is false. This is because the accumulation of unplanned inventories causes aggregate output to decrease. This is because when firms accumulate excess inventory the form will realize that continuing to produce at the same production level then this will contribute to even larger inventories. This excess inventory is costly to the firm therefore they will decrease output level. Therefore aggregate output decreases, this is because when aggregate expenditures are less than aggregate output (AE<Y) aggregate output falls to restore the balance.
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Unformatted text preview: A5-6 Statement A5-6 is true. This is because a rise in price levels causes the aggregate expenditure curve to shift downward and hence this leads to an upward and left movement along the aggregate demand curve. As seen in the diagram below as AE increases to AE 1 the point of equilibrium shifts leftward on the 45 degree line. This shift results in leftward shift along the aggregate demand curve as seen on the diagram as E moves to E . **** The diagram is on page 551 of the text….its both graphs one under the other....
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