When PAE

Name: When PAE < Y the economic response for inventories should be: A) inventories will increase. B) inventories will decrease. C) there will be no change in inventories. D) inventories should decrease initially and then sharply increase.
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Question

When PAE < Y the economic response for inventories should be:
A) inventories will increase.
B) inventories will decrease.
C) there will be no change in inventories.
D) inventories should decrease initially and then sharply increase.

Quizplus · Accepted Answer

When PAE < Y, there is less demand for goods and services than the economy can produce, which leads to excess inventory. To reduce this excess inventory, firms will decrease production and increase inventory holdings. Therefore, inventories will increase.

When PAE < Y the Economic Response for Inventories Should