Explain why if planned aggregate expenditure > output, the economy is not in equilibrium.
*Output includes inventory*This means that there is excess inventory -> you need to decrease expenditure
If planned aggregate expenditure is greater than output, it means that the demand for goods and services in the economy is higher than the actual level of production. This creates a situation of excess demand where consumers are willing to buy more goods and services than the producers are able to supply. In such a situation, there is likely to be shortages of goods and services, which can lead to rising prices and inflation.
In an economy that is not in equilibrium, there is a gap between what is being produced and what is being demanded. This gap is referred to as the output gap. The output gap represents the difference between the economy’s potential output and actual output. When the output gap is positive, it implies that the economy has the ability to produce more goods and services than it is currently producing.
To bring the economy back to equilibrium, producers need to increase output to match the level of demand. This can be achieved through increased investment in capital goods, increased hiring of labor, or increased efficiency in production. Alternatively, government can increase spending to boost demand and stimulate economic growth.
In summary, if planned aggregate expenditure exceeds output, the economy is not in equilibrium because there is a gap between what is being produced and what is being demanded. This can have negative consequences for the economy, including inflation and supply shortages. To restore equilibrium, output needs to be increased to match the level of demand.
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