Final answer:
If household expenditure decreases by $20 billion with unchanged production, total real GDP will likely decrease due to lower consumption, one of its main components. Even with the other components stable, the decrease in consumption directly impacts GDP and aggregate demand negatively.
Step-by-step explanation:
If household expenditure falls by $20 billion and there is no other change affecting real GDP, then the total real GDP will likely decrease, since one of its main components, consumption (C), has decreased. In the circular flow of income, GDP is an indicator of production, income, and expenditure. Thus, if businesses continue to produce at the same rate, but households reduce their expenditure, then unsold inventory will increase, signaling overproduction. This situation could eventually cause businesses to reduce production, leading to layoffs and a subsequent drop in income and consumption.The main components of GDP are consumption (C), investment (I), government spending (G), and net exports (NX). A fall in consumption has a direct effect on GDP, as the current production of consumer goods exceeds the consumption, creating an imbalance. Since we are assuming no other changes, investment, government spending, and net exports remain constant. However, the decrease in consumption would reduce the aggregate demand in the economy, impacting GDP negatively.To understand changes to real GDP, one must consider nominal GDP and remove the impacts of price changes using the GDP deflator. Nominal GDP measures the value of all final goods and services produced at current prices, while real GDP adjusts for inflation to reflect the actual volume of production. The GDP deflator is crucial in separating price changes from true production growth. Considering historical data, nominal GDP growth can give an exaggerated sense of economic expansion if not adjusted for inflation, as seen by a comparison of figures from 1960 to later years.