If AE= $6,200 and Y (Income)= $5,800, businesses will produce: a) more, raising both employment and income b) less, lowering both employment and income c) more, raising employment and lowering...

If AE= $6,200 and Y (Income)= $5,800, businesses will produce:

a) more, raising both employment and income

b) less, lowering both employment and income

c) more, raising employment and lowering income

d) less, lowering employment and raising income

Asked on by jscott6613

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

If I understand this question correctly, the best answer is A.  This is a question about macroeconomic equilibrium, comparing aggregate expenditure (I assume that is what AE means) and income.  When aggregate expenditures are higher than income (which is the same thing as real Gross Domestic Product), businesses will produce more goods.  If they produce more goods, they will most likely increase the level of employment in the economy and they will also increase income (GDP) levels.

When aggregate expenditures are higher than income, it means that people are planning to buy more goods than businesses are producing.  If the people buy more than the businesses are producing, the businesses will have to draw down their inventory just as a person has to draw down their savings if they spend more than they earn.  Businesses typically want to maintain a certain level of inventory so they do not run out of their products.  If they draw down their inventory, they will then need to increase production so that they can satisfy demand and also build their inventory back up.  This means they will produce more.

When businesses produce more, they typically have to hire more people to do the actual production.  This should cause employment to rise.  When they produce more things, they are also raising income.  Therefore, A is the best answer.

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