The diagram below shows total output Y on the xaxis and Plan

The diagram below shows total output Y on the x-axis and Planned Aggregate Expenditures on the y-axis. Unplanned inventory investment is: AE 45 degree line PAE Positive at YL and positive at YH Positive at Y and negative at YH O Negative at Y and positive at YH Negative at Y and negative at YH zero at Y and zero at YH.

Solution

The economy is said to be in equilibrium when the Y line which is GDP intersects the AE line which is aggregate expenditure.This line is the 45 degree line.At the equilibrium level,planned investment equals actual investment.When the aggregate expenditure is either too high or too low then it is not in equilibrium.

The Y^L indicates that the aggregate expenditure is high resulting in an unplanned decrease in inventories as the businesses will sell off their inventories which will result in higher investment as business will produce more to get to the equilibrium level and so,the GDP increasesOn contrary, the Y^H indicates that the aggregate expenditure are too low resulting in an unplanned increase in inventories as the businesses will build up more inventories which would result in lower investment as businesses slow down their production because warehouses are filling up fast and the GDP will decrease.

Therefore,unplanned inventory investment will be negative at Y^L and positive at Y^H.