NCERT Class 12 Economics — Chapter 6: Determination of Income and Employment

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If the ex ante Aggregate Demand is less than the ex ante Aggregate Supply, what is the consequence?

Official previous-year question

Verified 1 Aug 2026.

Options

AImmediate rise in employment.
BUnintended depletion of inventories.
CUnintended accumulation of inventories.
DIncrease in the interest rate.

Did you get this right?

Solution

The correct option is Unintended accumulation of inventories.

Explanation

In macroeconomics, ex ante refers to "planned" or "intended" values, while ex post refers to "actual" or "realized" values. Equilibrium in an economy is achieved when ex ante Aggregate Demand (AD) equals ex ante Aggregate Supply (AS). Discrepancies between the two trigger adjustment mechanisms involving inventory levels.

Detailed Analysis:

Condition (AD < AS): When ex ante Aggregate Demand is less than ex ante Aggregate Supply, it implies that consumers and investors plan to purchase fewer goods and services than producers plan to produce.
Consequence: Since the planned supply exceeds the planned demand, producers are unable to sell all their output. This results in goods remaining unsold.
Inventory Adjustment: These unsold goods are added to the producers' stock, leading to an unintended accumulation of inventories. This is "unintended" because it was not part of the producers' planned inventory investment.
Subsequent Effect: To correct this imbalance, producers will cut back on production in the subsequent period to clear the excess stock. This eventually leads to a decrease in income and employment, not a rise.

Analysis of Incorrect Options:

Unintended depletion of inventories. Unintended depletion of inventories: This occurs in the opposite scenario, where AD > AS (demand exceeds supply), causing producers to sell from their existing stock to meet excess demand.
Immediate rise in employment. Immediate rise in employment: When inventories accumulate unintentionally, firms reduce production targets, which typically leads to a reduction, not a rise, in employment.
Increase in the interest rate. Increase in the interest rate: This is not the direct consequence of AD < AS in the goods market. Generally, low demand might exert downward pressure on interest rates or prices, but the immediate physical adjustment is in inventory levels.

Key Takeaway:

If Planned Demand < Planned Supply, producers face an unintended buildup of stock (inventory accumulation), prompting them to reduce future output to restore equilibrium.

Your note

More from Chapter 6: Determination of Income and Employment

With reference to the government sector in the determination of income, consider the following statements: 1. Government expenditure adds to the aggregate demand similar to investment and consumption. 2. Taxes imposed by the government increase the disposable income of households. 3. In the absence of indirect taxes, the GDP is identically equal to the National Income. Which of the statements given above is/are correct?

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Match List I with List II and select the correct answer using the code given below: List I | List II A. Excess Demand | 1. Amplifies changes in autonomous expenditure B. Deficient Demand | 2. Leads to a decline in prices in the long run C. Multiplier | 3. Signals that supply exceeds demand D. Inventory Accumulation | 4. Leads to a rise in prices in the long run

medium

Consider the following statements regarding Savings in an economy: 1. Savings is defined as the portion of income that is used for tax payments. 2. The Marginal Propensity to Save (MPS) is the change in savings per unit change in income. 3. If the Marginal Propensity to Consume (MPC) is 1, the Marginal Propensity to Save (MPS) will be 0. Which of the statements given above is/are correct?

easy

What does "Negative Inventory Investment" signify in an economy? 1. A rise in the stock of finished goods. 2. A depletion of existing stock to meet excess demand. 3. A situation where planned sales are less than actual sales. Which of the statements given above is/are correct?

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With reference to the consumption function in an economy, consider the following statements: 1. Autonomous consumption is the consumption expenditure that occurs only when income is positive. 2. Induced consumption is the portion of consumption that varies directly with the level of income. 3. The marginal propensity to consume determines the rate at which induced consumption changes as income changes. Which of the statements given above is/are correct?

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The correct option is Unintended accumulation of inventories.

Explanation

Detailed Analysis:

Condition (AD < AS): When ex ante Aggregate Demand is less than ex ante Aggregate Supply, it implies that consumers and investors plan to purchase fewer goods and services than producers plan to produce.
Consequence: Since the planned supply exceeds the planned demand, producers are unable to sell all their output. This results in goods remaining unsold.
Inventory Adjustment: These unsold goods are added to the producers' stock, leading to an unintended accumulation of inventories. This is "unintended" because it was not part of the producers' planned inventory investment.
Subsequent Effect: To correct this imbalance, producers will cut back on production in the subsequent period to clear the excess stock. This eventually leads to a decrease in income and employment, not a rise.

Analysis of Incorrect Options:

Unintended depletion of inventories. Unintended depletion of inventories: This occurs in the opposite scenario, where AD > AS (demand exceeds supply), causing producers to sell from their existing stock to meet excess demand.
Immediate rise in employment. Immediate rise in employment: When inventories accumulate unintentionally, firms reduce production targets, which typically leads to a reduction, not a rise, in employment.
Increase in the interest rate. Increase in the interest rate: This is not the direct consequence of AD < AS in the goods market. Generally, low demand might exert downward pressure on interest rates or prices, but the immediate physical adjustment is in inventory levels.

Key Takeaway:

If Planned Demand < Planned Supply, producers face an unintended buildup of stock (inventory accumulation), prompting them to reduce future output to restore equilibrium.