Question:medium

What is the difference between planned and unplanned inventory accumulation? Explain.

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Unplanned inventory change = AS - planned AD; it signals disequilibrium and drives output adjustment.
Updated On: Sep 23, 2026
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Solution and Explanation

Step 1: Contrast intention:
Planned inventory build-up is a choice the firm makes on purpose (e.g. building stock before a known sales season). Unplanned inventory build-up is a surprise, forced on the firm by demand not matching its production estimate.

Step 2: Use the equilibrium-adjustment lens:
In the Keynesian model, equilibrium output occurs where planned aggregate expenditure equals output. Whenever output differs from planned expenditure, the gap shows up as unplanned inventory investment (positive if output > expenditure, negative if output < expenditure).

Step 3: Explain the corrective role:
Seeing unplanned inventories pile up, firms cut back production in the next period; seeing unplanned inventory depletion, firms raise production — this feedback loop is exactly how the economy converges to the equilibrium level of income.

Final Answer:
Planned = a deliberate investment choice; unplanned = the disequilibrium signal (AD vs AS mismatch) that drives output adjustment to equilibrium.
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