Assuming inflexible prices, if the demand for many goods and services falls across the entire economy and for an extended period of time:
A)many firms will face a constant reduction in their inventories.
B)many firms will face with an inventory pile up and will be forced to cut production.
C)many firms will face with an inventory pile up and will be forced to hire more workers.
D)many firms will face a constant reduction in their inventories and will be forced to hire more workers.

Question

Quizplus · Accepted Answer

If the demand for goods and services falls for an extended period of time, firms will face a situation of excess inventory. This will lead to a pile-up of inventory, and firms will be forced to cut production to align with the reduced demand. The inflexible prices assumed in the question means that firms cannot adjust prices easily to compensate for the fall in demand, which further exacerbates the situation. In such a scenario, firms are more likely to cut production and reduce their inventory levels than to keep producing and be stuck with unsold goods. Hiring more workers will not be necessary, as the fall in demand implies that firms will need fewer workers to produce the reduced quantity of goods.

Assuming Inflexible Prices, If the Demand for Many Goods and Services