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Chapter 6: Problem 18

During severe recessions, inventory investment is \- \((\mathrm{LO} 2)\) a) negative c) fairly high b) stable d) very high

Short Answer

Expert verified
During severe recessions, inventory investment is typically negative, as businesses decrease their inventory levels in response to lower consumer demand and reduced production.

Step by step solution

01

Understanding inventory investment

Inventory investment is the change in a firm's inventory levels between two periods. It refers to the amount that firms invest in storing and maintaining their inventories. This investment may include raw materials, work-in-progress, and finished goods. Positive inventory investment means a firm is increasing its inventory levels, while negative inventory investment indicates that a firm is decreasing its inventory levels.
02

Impact of severe recessions on businesses

A severe recession is characterized by a significant decline in economic activity, high unemployment rates, and reduced aggregate demand. During such periods, businesses often experience a decrease in consumer spending, leading to lower sales and reduced production. As a result, businesses need to adjust their inventory management strategies accordingly.
03

Inventory investment trends during severe recessions

During severe recessions, businesses typically tend to reduce their production levels in response to lower consumer demand. This means they might not need large amounts of raw materials, work-in-progress, and finished goods. Consequently, they may decrease their inventory levels, resulting in a negative inventory investment. Hence, the correct answer is: a) negative

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Most popular questions from this chapter

Ownership of a corporation is based on (LOI) a) whether you work for the company b) whether you buy from the company c) whether you hold the bonds of the company d) whether you hold stock in the company

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