When the strong positive correlation between inventories and GDP is violated, it is usually because
A) forward-looking businesses missed a turn in aggregate demand and buffer stocks either climb as GDP falls or fall as GDP climbs.
B) forward-looking businesses missed a turn in aggregate demand and their pipeline holdings of material inputs are bid up as GDP falls or bid down as GDP rises.
C) investment projects undertaken by businesses cost more than expected during inflationary upturns.
D) investment projects lose significant amounts of money when they are undertaken during deflationary recessions.
E) none of the above.

Question

Quizplus · Accepted Answer

A) This choice correctly explains a scenario where the strong positive correlation between inventories and GDP is violated. When businesses misjudge future demand, their inventory levels may not align with GDP movements, leading to an increase in inventories as GDP falls or a decrease as GDP rises.

When the Strong Positive Correlation Between Inventories and GDP Is