Question

consider a simple keynesian model in which firms are currently holding an optimum inventory level of $1.2 million worth of goods. if the three sectors of the economy then purchase $3 million worth of goods and firms produce $2.5 million worth of goods inventories will to .

Answer 1

If the three sectors of the economy purchase $3 million worth of goods and firms produce $2.5 million worth of goods while holding an optimum inventory level of $1.2 million, inventories will increase by $4.3 million.

Step-by-step explanation:

In a simple Keynesian model, firms currently hold an optimum inventory level of $1.2 million worth of goods. If the three sectors of the economy then purchase $3 million worth of goods and firms produce $2.5 million worth of goods, inventories will increase.

The increase in inventories will be calculated by taking the difference between the total purchase and production amount and the optimum inventory level. In this case, the increase in inventories will be $3 million + $2.5 million - $1.2 million = $4.3 million.

Answer 2

In the Keynesian model scenario, if the economy purchases $3 million and firms produce $2.5 million, inventories will decrease by $0.5 million to a new level of $0.7 million, reflecting an adjustment to match purchases with available goods.

Step-by-step explanation:

The student's question is focused on the Keynesian model, specifically on the impact of purchasing and production levels on inventories in an economy. In the scenario described, firms are holding an optimum inventory level of $1.2 million before the transactions occur. If the economy purchases $3 million worth of goods while firms produce $2.5 million, there will be a discrepancy since purchases exceed production. To address the purchases, firms will need to deplete their inventories by the difference between purchases and production, i.e., $3 million - $2.5 million = $0.5 million. Therefore, the new inventory level will be $1.2 million - $0.5 million = $0.7 million. This adjustment reflects firms' expectations of selling their output and maintains an equilibrium between aggregate expenditure and national income as demonstrated in Keynesian Cross Diagrams like Figure D7 or B7.