Recent Data Analysis: Keynesian Model's Interpretation of Rising Inventory-to-Sales Ratio

The Keynesian Model: Implications of Increased Inventory-to-Sales Ratio

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Question

Recent data reveal that the ratio of inventories to sales has risen sharply, suggesting that businesses are experiencing an unplanned build-up in inventories.

According to the Keynesian model, these findings indicate that

Answers

A. the economy is operating at full-employment equilibrium, which will probably be sustained in the foreseeable future.

B. aggregate expenditures exceed output and, as a result, inflation is likely to accelerate.

C. aggregate expenditures exceed output and, as a result, national income will rise.

D. aggregate expenditures are less than output and, as a result, national income will decline.

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Explanations

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A. B. C. D.

Actual inventories exceed planned inventories only when actual expenditures fall short of expected expenditures. Thus, producers anticipated a certain level of expenditure and produced output accordingly. Thus, output exceeded expenditure and national output (i.e., income) will decline.

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