Question

"If actual demand for final goods falls short of the actual output of final goods corresponding to full employment level, it may lead to an unintended accumulation of inventories."
Do you agree with the given statement? Give valid reasons in support of your answer.

Hint:

Inventory buildup occurs when actual demand falls short of production, leading to reduced production and economic contraction.

Answer 1

When actual demand is less than output at the full employment level, unsold goods accumulate as inventories for firms. This unintended inventory accumulation signals to producers that supply exceeds demand, leading to reduced production in subsequent periods. This reduction in production decreases income and employment, moving the economy below its full employment level.