Note: we have both underreaction and overreaction:
- Rising aggregate demand can call forth greater than one-for-one increases in national product as firms respond by thinking that it is time to rebuild their inventories back up to normal levels.
- Conversely, falling aggregate demand can call forth greater than one-for-one decreases in national product as firms respond by thinking that it is time to cut back on their inventories.
- This actually happened in the business cycle that started in 1990...
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