Question

A firm planned to sell its entire output during the year, but actual sales fell short of planned sales. The gap between the firm's desired demand and its actual (effective) demand arises from:

Options

• A fall in the rate of interest

• Unplanned inventory changes

• Planned inventory accumulation

• An increase in government expenditure

Answer 1

When actual sales fall short of planned sales, unsold goods pile up as unplanned inventories. This unplanned inventory change is precisely what causes desired (ex-ante) and actual (ex-post) demand to differ when the economy is away from equilibrium.