Suppose that all firms in the economy experience a sudden and unexpected increase of $125 billion in their inventories. We can say that:
A) firms will be reluctant to reduce their level of output, because they believe that consumption spending will eventually increase.
B) household spending was more than what the firms had initially estimated.
C) the level of planned inventories has remained constant.
D) firms over estimated aggregate expenditure by $125 billion.

Question

Quizplus · Accepted Answer

An unexpected increase in inventories suggests that firms produced more goods than were actually sold, indicating they overestimated the demand or aggregate expenditure by $125 billion. This does not necessarily imply expectations about future consumption (A), it indicates that household spending was less than anticipated (opposite of B), and it shows that the level of planned inventories has not remained constant because actual inventories exceeded planned inventories (contrary to C).

Suppose That All Firms in the Economy Experience a Sudden