Question

Inventories typically increase starting at the beginning of recessions, and begin to decline near the end of recessions. What does this say about the relationship between planned spending and aggregate output over the business cycle?

Short answer

This states that planned spending & aggregate output are directly related, and they are inversely related to inventory level.

Step-by-step solution

Step 1. Introduction 

Business Cycle denotes periodic & cyclical growth, decline in output & GDP level of an economy.

Recession refers to decline in overall level of economic activity. It is characterised by two consecutive quarters of economic decline, paired with increase in unemployment levels.

Step 2. Explanation

At the beginning of recessions, consumers' planning to buy has reduced, & is lesser than firms planning to produce. This leads to more than desired inventory accumulation.

• Here, lesser planned spending & consecutively lesser Aggregate Demand decrease the equilibrium output level.

At the end of recessions - when the economy is verge of recovery : consumers are planning to buy more, with firms retaining previous tendencies of lesser planned production. This leads to less than desired inventory accumulation.

• Here, more planned spending & consecutively more Aggregate Demand increases the equilibrium output level.