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:
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:
Solution
Option 3: (A), (D), (B), (C) -> When planned spending falls short of planned output, it creates a disequilibrium in the economy. First, unsold goods accumulate leading to unintended accumulation of inventories (A). Seeing excess inventory, producers plan to produce less in the next period (D) to avoid further accumulation. As production is reduced, firms require fewer workers, so employment level falls (B). Finally, with lower employment and production, output and income fall until equilibrium is restored (C) where planned spending equals planned output. This sequential chain (A)→(D)→(B)→(C) represents the adjustment mechanism in the economy moving from disequilibrium to equilibrium. -> correct
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