Fill in the blanks below with ↑ to indicate an increase in the variable or with ↓ to indicate a decrease in the variable. Answer the questions with a brief written response.
A) Consumption > Production ⇒ Economy is Out of Equilibrium ⇒ Inventories __ ⇒ Prices must __ or Production must __ to Restore Equilibrium ⇒ Inventories __ ⇒ Consumption = Production ⇒ Economy is back in Equilibrium
Under what conditions is price more likely to change than production to restore equilibrium in this situation?
B) Consumption__Production ⇒ Economy is Out of Equilibrium ⇒ Inventories__⇒ Prices must__ or Production must ↑ to Restore Equilibrium ⇒ Inventories__⇒ Consumption = Production ⇒ Economy is back in Equilibrium
Under what conditions is production more likely to change than price to restore equilibrium in this situation?
C) Consumption < Production ⇒ Economy is Out of Equilibrium ⇒ Inventories__ ⇒ Prices must__ or Production must__ to Restore Equilibrium ⇒ Inventories__⇒ Consumption = Production ⇒ Economy is back in Equilibrium
Under what conditions is price more likely to change than production to restore equilibrium in this situation?
A) In this situation, if Consumption is greater than Production, the economy is out of equilibrium. In order to restore equilibrium, Inventories must ↓ (decrease). To achieve this, Prices must ↓ (decrease) or Production must ↑ (increase). As a result, Inventories will eventually ↓ (decrease) until Consumption equals Production, at which point the economy is back in equilibrium. Therefore, when Consumption exceeds Production, prices are more likely to decrease than production to restore equilibrium.
B) When Consumption is less than Production, the economy is out of equilibrium. To restore equilibrium, Inventories must ↑ (increase). In order to achieve this, Prices must ↑ (increase) or Production must ↑ (increase). As a result, Inventories will eventually ↑ (increase) until Consumption equals Production, and the economy is back in equilibrium. Therefore, when Consumption is less than Production, production is more likely to increase than prices to restore equilibrium.
C) If Consumption is less than Production, the economy is out of equilibrium. To restore equilibrium, Inventories must ↑ (increase). In order to achieve this, Prices must ↑ (increase) or Production must ↑ (increase). As a result, Inventories will eventually ↑ (increase) until Consumption equals Production, at which point the economy is back in equilibrium. Therefore, when Consumption is less than Production, prices are more likely to increase than production to restore equilibrium.