Question

The figure shows the simple aggregate expenditures model for an economy. Which of the following statements is the proper sequence of events if the economy is currently operating at point A?
A) Total income exceeds spending, firms expand production, workers are hired, and incomes rise until equilibrium is reached

B) Total income exceeds spending, firms reduce production, workers are laid off, and incomes fall until equilibrium is reached

C) Total spending exceeds income, firms reduce production, workers are laid off, and incomes fall until equilibrium is reached


D) Total spending exceeds income, firms expand production, workers are hired, and incomes rise

Answer 1

Total income exceeds spending, firms reduce production, workers are laid off, and incomes fall until equilibrium is reached

Answer: Option B.

Explanation:

In the diagram that has been given here, the income in the graph is more than the expenditure in the graph at the point A.

The point of equilibrium is lower at this point in the graph. To reach the equilibrium, the income should be reduced and the employees should be laid off so that equilibrium is restored.