Inventories held by ﬁrms
A) tend to increase the severity of short-run ﬂuctuations.
B) tend to reduce the severity of short-run ﬂuctuations.
C) are held by businesses because they are a costless way of responding to demand shocks.
D) are the result of positive demand shocks.

Question

Quizplus · Accepted Answer

Inventories held by firms tend to reduce the severity of short-run fluctuations because they provide a buffer between demand shocks and production, allowing firms to continue supplying their customers even when demand unexpectedly increases. Additionally, when demand unexpectedly decreases, firms can draw down their inventories rather than cutting production immediately, which helps to stabilize employment and incomes.

Inventories Held by ﬁRms