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    Inventory growth and the business cycle

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    Suppose that inventory growth in the United States is unexpectedly high this year. What is likely to happen to output next year, and why? Is the economy currently in equilibrium? Use the Keynesian cross model to explain your answers.

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    Solution Preview

    This is a business cycle question. The business cycle revolves around inventories. When demand begins to decline, it is at first not noticeable, because businesses tend to be in the habit of ordering the same amounts. Thus the first indication of the decline in demand is an increase in inventory; the business has not sold as much as anticipated, and discovered more merchandise is present than they anticipated. Their response is to ...

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