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: Defining National Income Equilibrium.
Equilibrium occurs when planned investment equals actual investment. If planned investment is greater than actual investment, firms will produce more than they sell, leading to an unplanned buildup of inventory.

Step 2: Evaluating the Options.
- (A) Unplanned inventory accumulation: This option is accurate. When \( I_d > I_r \), production exceeds sales, resulting in an unintended increase in inventory levels.
- (B) Unplanned inventory shortfall: This option is inaccurate. An inventory shortfall arises when actual investment surpasses planned investment.
- (C) No change in inventory stock: This option is inaccurate. A discrepancy between planned and actual investment will invariably alter inventory levels.
- (D) Increasing tax rate: This option is irrelevant. The equilibrium condition pertains to investment, not tax rates.

Step 3: Final Determination.
Option (A) is the correct choice, as unplanned inventory accumulation is the consequence of \( I_d > I_r \).