When the Aggregate demand is greater than the Aggregate supply, the economy will face a situation. Identify the related situation from the following :
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Unplanned decumulation of inventories
When aggregate demand is greater than aggregate supply, buyers want more than firms have produced. Firms sell more than they expected and meet the extra demand from their stock of unsold goods, called inventories. The stock falls without any plan, so it is an unplanned decumulation.
Option (1) Unplanned accumulation of inventories — Incorrect. This happens when sales fall short of what was expected, so unsold goods pile up. That is the case of aggregate demand less than aggregate supply.
Option (2) Planned accumulation of inventories — Incorrect. This is a stock the firm decides to build up. It does not come from demand being higher than supply.
Option (3) Unplanned decumulation of inventories — Correct. An unexpected rise in sales runs down the stock.
Option (4) Planned decumulation of inventories — Incorrect. Here the firm runs down its stock by choice. Excess demand cuts the stock without the firm planning it.
NCERT (2026-27): “2.2.1 The Product or Value Added Method … Change in inventories may be planned or unplanned. In case of an unexpected fall in sales, the firm will have unsold stock of goods which it had not anticipated. Hence there will be unplanned accumulation of inventories. In the opposite case where there is unexpected rise in the sales there will be unplanned decumulation of inventories.…” NCERT (2026-27), chapter ‘Determination of Income and Employment’: “4.1 Aggregate Demand and its Components … Suppose the producer plans to add Rs 100 worth goods to her stock by the end of the year. Her planned investment is, therefore, Rs 100 in that year. However, due to an unforeseen upsurge of demand for her goods in the market the volume of her sales exceeds what she had planned to sell and, to meet this extra demand, she has to sell goods worth Rs 30 from her stock. Therefore, at the end of the year, her inventory goes up by Rs (100 – 30) = Rs 70 only. Her planned investment is Rs 100 whereas her actual, or ex post, investment is Rs 70 only.…” |