Question

If aggregate demand exceeds the value of the economy's output, it is likely that:

	a.	Government expenditures are rising.
	b.	GDP will fall.
	c.	inventories are rising.
	d.	inventories are falling.
	e.	none of the above.

Answer 1

Answer : (d) inventories are falling

When aggregate demand is increasing, it means that there is more demand in the market for goods and services than whatever is the aggregate supply in the market. It essentially means that inventories are less. It could also be because of increasing public expenditure so that people have more money in hands.

Since there is lack of supply in the market to meet the demand, the producers should raise the production levels to meet the demand, i.e, Inventories should be added up.