In situations of sticky prices and negative demand shocks, we would expect firms to
A)deplete inventories before increasing production.
B)reduce production before building up inventories.
C)build up inventories before reducing production.
D)lower prices before reducing production or building up inventories.

Question

Quizplus · Accepted Answer

In the presence of sticky prices and negative demand shocks, firms are likely to build up inventories first because prices do not adjust quickly, leading to excess supply. Reducing production is typically a subsequent step if the demand shock persists.

In Situations of Sticky Prices and Negative Demand Shocks, We