Discussion
If actual output is to the right of intersection of 45-degree line and the AD curve, then which of the following is true?
Answer: A
Actual output to the right of the intersection of the 45 degree line and the AD curve means that output is higher than the aggregate demand at that point, so the goods produced exceed what is bought. There is an excess supply of goods, inventories pile up unintentionally, and firms cut output until equilibrium is reached. A fall in inventories or inflation would happen if output was to the left of the intersection. The answer is option A. As stocks of unsold goods rise, firms cut production, which moves output back to the left to the equilibrium point.
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