Question

When total production is greater than total expenditures, __________ is produced than households want to buy, which leads to __________ in inventory, which signals firms that they have __________, which causes firms to cut back production.

a. less; decreases; underproduced
b. less; increases; overproduced
c. more; decreases; underproduced
d. more; increases; overproduced?

Answer 1

If the total production exceeds the total expenditures this means that there are more goods are produced than the demand of each households. Thus, this will lead to an increase of inventory. Then this will signal the manufacturing firm that they have overproduced the goods which will lead to cut back the production. This leads to lesser prices and/or unsold goods alongside with the likelihood of unemployment. Therefore the answer is d.