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In an economy without a government, the ex ante aggregate demand for final goods is the sum total of the ex ante consumption expenditure and ex-ante investment expenditure on such goods. Ex -ante supply is equal to ex ante demand only when the final goods market, and hence the economy, is in equilibrium. 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, stocks will be piling up in the warehouses, which may be considered as an unintended accumulation of inventories. Change in inventory is called inventory investment. It can be negative as well as positive: if there is a rise in inventory, it is positive inventory investment, while a depletion of inventory is negative inventory investment. The inventory investment can take place for two reasons: (i) the firm decides to keep some stocks for various reasons (ii) the sales differ from the planned level of sales, in which case the firm has to add to/run down existing inventories.

If ex ante demand falls short of the output of final goods that the producers have planned to produce in a given year, this is known as:

Solution

✅ Correct Option: 3

When ex-ante demand falls short of planned output, unsold stocks pile up in warehouses. This unintended accumulation of inventories was not planned by the firms, so it constitutes unplanned (unintended) inventory investment. Planned inventory investment refers to stocks firms deliberately decide to hold. Hence option 3.

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