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 as they serve as a buffer between demand and supply. In times of high demand, businesses can quickly respond by selling their inventories, and during low demand periods, they can draw upon their inventories to continue supplying goods and services without interruption. This helps to stabilize prices and output levels, thereby reducing the severity of short-run fluctuations.

Inventories Held by Firms