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Put the alternatives given below in the sequence in which they occur to reach the equilibrium level of out put given that aggregate demand falls short of aggregate supply.

(A) In this case, the firm has to run down existing inventories, which will lead to a fall in production and hence income.

(B) Stocks will be piling up in the warehouses, causing unintended accumulation of inventories.

(C) 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.

(D) process continues till Ex- ante demand for final goods equals to ex -ante output of final goods

Choose the correct answer from the options given below:

Solution

✅ Correct Option: 4

Option 4: (C), (B), (A), (D) -> This follows the correct sequence of adjustment mechanism when aggregate demand falls short of aggregate supply. It starts with the initial disequilibrium (C), followed by unintended inventory accumulation (B), then the response by firms to reduce production (A), and finally reaches equilibrium (D) -> correct


Hence, Option 4: (C), (B), (A), (D) -> When AD < AS, the adjustment process follows this logical sequence:

  1. (C) - Initial situation: Ex-ante demand falls short of ex-ante output (planned production exceeds planned demand)
  2. (B) - Consequence: Since goods cannot be sold, stocks pile up in warehouses causing unintended inventory accumulation
  3. (A) - Adjustment mechanism: Firms respond by cutting down production to clear the accumulated inventories, leading to fall in output and income
  4. (D) - Final equilibrium: This adjustment process continues until ex-ante demand equals ex-ante output, restoring equilibrium

This represents the standard Keynesian adjustment process through inventory changes -> correct

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