question archive In the Keynesian model, the economy is in equilibrium when the actual inventory level is smaller than the level firms were planning to hold True False Explain
In the Keynesian model, the economy is in equilibrium when the actual inventory level is smaller than the level firms were planning to hold True False Explain
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In the Keynesian model, the economy is in equilibrium when the actual inventory level is smaller than the level firms were planning to hold
True
False
Explain.
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The statement is false.
Firms draw smaller inventories than they had planned to hold when the aggregate demand is higher than the GDP. It results in situations where the inventory stocks are lower than the optimum level of inventory. Firms then produce more to increase income for the next period to get their inventory back to wherever they want them. The firm's tendency to change its inventory levels makes this state not an equilibrium level of income as a shift in inventories is a signal of decreasing or increasing production.
Only one level of output is stable; where the aggregate demand is equal to the GDP. Here, entities find that the produced output gets sold in exact produced quantities without shifts in the inventory; thus, the exact output gets produced in the next period, and any other period later, as long as the aggregate demand is equal to the real GDP. Then this level is the equilibrium state of national income or output.
