If real gdp and aggregate expenditure are greater than equilibrium​ expenditure, what happens to​ firms? inventories? how do firms change their​ production? and what happens to real​ gdp?

Question: If real gdp and aggregate expenditure are greater than equilibrium​ expenditure, what happens to​ firms? inventories? how do firms change their​ production? and what happens to real​ gdp? 

When real GDP and aggregate expenditure are greater than equilibrium expenditure, it indicates an excess demand situation in the economy. Let's explore the effects on firms, inventories, production, and real GDP:

1. Firms:

   - Firms experience an increase in demand for their goods and services beyond what was initially anticipated.

   - They may observe higher sales and revenues due to increased consumer and investment spending.

   - Firms may also face pressure to meet the additional demand promptly.

2. Inventories:

   - With aggregate expenditure surpassing equilibrium expenditure, the demand for goods and services is outpacing the supply.

   - Firms' inventories are likely to deplete faster than they can produce new goods to replenish them.

   - In this situation, firms' inventories may decrease as they sell off existing stock to meet the heightened demand.

3. Production:

   - Firms will respond to the increased demand by ramping up their production levels.

   - They may increase their output to meet the higher demand and reduce the gap between demand and supply.

   - This might involve hiring additional workers, utilizing idle production capacity, or employing other resources to boost production.

4. Real GDP:

   - As firms increase their production to meet the higher demand, the overall level of economic activity, as measured by real GDP, also rises.

   - Real GDP will likely increase due to the surge in economic activity and higher production levels.

   - The economy moves closer to equilibrium as firms respond to the increased demand, but achieving perfect equilibrium might take time depending on the responsiveness of the production process.

In summary, when real GDP and aggregate expenditure are greater than equilibrium expenditure, firms experience increased demand for their goods, inventories decrease due to the faster depletion of stock, firms respond by increasing production, and real GDP increases as a result of the heightened economic activity.

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