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 allow firms to smooth production over time, reducing the need for drastic changes in production levels in response to short-term fluctuations in demand, thus reducing the severity of short-run fluctuations.

Inventories Held by Firms