1. The income-expenditure model is most appropriate for long-run analysis. ____ (True/False)
2. Equilibrium output occurs when real output equals planned expenditures. ____ (True/False)
3. If output is currently higher than planned expenditures, inventories are ____ (increasing/ decreasing).
4. At any point on the 45° line, planned expenditures equal ____.
5. Understanding Inventory Behavior. Use the simple income-expenditure model to analyze the following scenarios.
a. Suppose clothing stores anticipate a good fashion season and add substantially to inventories in their stores. What will happen to GDP?
b. Suppose economists see inventories suddenly increasing. Does this necessarily mean that there are increases in demand for final goods and services?
6. Understanding the 45° Line. Use the simple income-expenditure diagram depicted in Figure to answer the following questions.

a. If output equals y1, what is the level of expenditures?
b. At output equal to y1, does the level of expenditures fall above, below, or on the 45° line?
c. What does this say about the relationship between output andexpenditures?

di Excess production da C+I Insufficient production 45 Output, y