Output,employment and inventories under general excess supply

The paper examines how the results of the Barro-Grossman (1971, 1976) model are modified when inventories are added to their framework. As inventories are introduced, the demand for labor becomes sensitive to the real wage even when there exists general excess supply, and it becomes less sensitive to aggregate demand than in the Barro-Grossman model. A cut in real wage can increase output and employment in this same framework a result that runs counter to the conclusion in the existing Keynesian literature. The demand multiplier comes out to be weaker than in the no-inventory case.