In an imaginary economy, the planned spending falls short of planned output at a certain level of employment. Arrange the following consequences of the same in sequential order.
(A) Unintended accumulation of inventories.
(B) The employment level falls.
(C) The output and income fall and the equilibrium is restored.
(D) Producers plan to produce less in the next period.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (A), (D), (B), (C)
When planned spending falls short of planned output, firms cannot sell all they make. They then cut back step by step until the two are equal:
(A) Unintended accumulation of inventories. — Unsold goods pile up in the warehouses. This is an unplanned rise in stocks.
(D) Producers plan to produce less in the next period. — Seeing the stocks pile up, producers decide to cut production in the next round.
(B) The employment level falls. — Less production needs fewer workers.
(C) The output and income fall and the equilibrium is restored. — Output falls, factor payments fall and so income falls. This goes on until planned spending equals planned output.
NCERT (2026-27): “4.2 Determination of Income in Two-Sector Model … If ex ante demand for final goods falls short of the output of final goods that the producers have planned to produce in a given year, equation (4.3) will not hold. Stocks will be piling up in the warehouses which we may consider as unintended accumulation of inventories.… …Stocks are piling up in warehouses and producers decide to cut the value of production by 75 in the next round to restore equilibrium in the market. But that would mean a reduction in factor payments in the next round and hence a reduction in income by 75.… The equilibrium output in the economy also determines the level of employment, given the quantities of other factors of production (think of a production function at aggregate level).…” |