Businesses hold inventories based on what they expect their sales to be. When aggregate demand is greater than expected, inventories fall below the targeted levels.
Explanation:
Inventories are the stocks that the businesses hold in order to meet the immediate demand of their product. They hold the inventories up to the level of the sales of the goods that they expect to be at a particular period of time.
When the aggregate demand of the product is more than the level of the demand expected, then the level of inventories maintained is also below the targeted levels. To maintain the demand equal to the supply, the production should be increased.
