2 If aggregate expenditure CIG X M is below current producti

2. If aggregate expenditure, C+I+G X- M), is below current production, then a. inventory stocks will pile up, leading business to trim production, causing GDP to fall b. inventory stocks will fall, leading businesses to increase production, causing GDP to rise. c. the price level will probably increase. the economy may experience inflation if the imbalance is not corrected by government stabilization policy d.

Solution

The aggregate expenditure, C + I + G + (X -M) constitutes the level of Aggregate Demand in an economy. If the level of aggregate demand in the economy is lesser than the production (that is, aggregate supply in the economy), inventory stocks increase as all that has been produced does not meet a customer and the currently produced goods keep on piling as inventories.

As a result, the producers cut production due to availability of goods held in stock and production falls. Thus, as a result, the GDP falls as well.

Thus, the correct answer is option a. inventory stocks will pile up, leading business to trim production, causing GDP to fall.