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Question

State whether the following are true or false. Give reasons:

(a) When AD>AS, there will be rise in inventories.

(b) When AD<AS, there will be fall in inventories

(c) APS is negative after the break-even point.

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Solution

(a) False. At an income level below the equilibrium level of income, the planned expenditure i.e., AD is greater than the aggregate supply. This implies that there is a shortfall in the availability of goods and services in the economy. This extra demand or shortfall is met by selling the inventory. Thus, the stock will reduce.

(b) False. At the income level above the equilibrium level of income, the planned expenditure i.e., AD is less than the aggregate supply. This implies that there is an excess availability of goods and services in the economy. This surplus in goods is added to the inventory stock of goods. Thus, inventory levels will rise.

(c) False. APS is negative before the break-even point because, before this income level, consumption is greater than income leading to dissavings. (Negative savings).


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