Suppose that the economy experiences an unplanned increase in its inventories. Firms will react by:
A) increasing their output and as a result, equilibrium income rises.
B) not changing their output because the disequilibrium in inventories will be self-correcting.
C) reducing their output and as a result, equilibrium income falls.
D) reducing their output with no significant change on equilibrium income.

Question

Quizplus · Accepted Answer

When firms experience an unplanned increase in inventories, it indicates that goods are not being sold as expected. To prevent inventory levels from rising further, firms typically reduce their output. This reduction in output leads to a decrease in the overall production of the economy, which in turn causes equilibrium income to fall.

Suppose That the Economy Experiences an Unplanned Increase in Its