Question

One of the conditions for national income or output to be in equilibrium is that the desired investment (Id) must equal the realised investment (Ir). If \( I_d > I_r \), the difference results in:

• A. Unintended inventory accumulation
• B. Unintended inventory shortfall
• C. No change in inventory stock
• D. Increasing tax rate

Hint:

When desired investment exceeds realised investment, firms experience unintended inventory accumulation.

Answer 1

The Correct Option is A

Step 1: Understanding equilibrium in national income.
In equilibrium, desired investment equals realised investment. If desired investment exceeds realised investment, firms will find their inventories accumulating as they produce more than is being sold.

Step 2: Analysis of options.
- (A) Unintended inventory accumulation: This is correct. If \( I_d > I_r \), firms produce more than they sell, leading to an unintended accumulation of inventories.
- (B) Unintended inventory shortfall: This is incorrect. A shortfall occurs when realised investment exceeds desired investment.
- (C) No change in inventory stock: This is incorrect. A mismatch between desired and realised investment leads to a change in inventory stock.
- (D) Increasing tax rate: This is unrelated. The condition for equilibrium is about investment, not tax rates.

Step 3: Conclusion.
The correct answer is (A), as unintended inventory accumulation occurs when \( I_d > I_r \).