Starting from a state of equilibrium trace the effects to inventories? how do firms react? to consumption? a

a. If the business managers anticipate future profits opportunities in consumer electronics, then they will start producing more to create the inventories so that they can meet the future demand of the goods. Therefore, this will lead to the rise in the inventories. With the rise in production, the supply of consumer electronics will increase and causes a rightward shift in the supply. This will also lead to a rise in prices and therefore, the consumption or the demand of the electronics goods will also rise.

b. The reduction in income tax rates by the government will increase the disposable income of the individuals and therefore the consumption will rise in the economy. With the higher demand at the existing price, the inventories of the firms start declining. This will also shift the aggregate demand curve to the right and causes an increase in the prices of goods and therefore, the quantity supplied by the firms will also rise.

c. With the reduction in the demand of US export, the aggregate demand curve will shift leftward and this will cause a rise in the stock of firms at the existing prices because at this point demand is less than the supply. The firms will react by reducing the quantity supplied. There will be no direct effect of this on consumption expenditure.