Question

If firms accumulate excess inventories and then spending quickly returns to its normal levels, what is the likely behavior of firms regarding their excess inventories?

A) Firms will sell their excess inventories before returning to normal production levels.
B) Firms will continue to accumulate more inventories.
C) Firms will donate their excess inventories to charitable organizations.
D) Firms will not sell their excess inventories before returning to producing at normal levels.

Answer 1

Firms are likely to sell their excess inventories before returning to normal production levels.

Step-by-step explanation:

When firms accumulate excess inventories during a period of low demand and spending quickly returns to normal levels, it is likely that firms will sell their excess inventories before returning to normal production levels. This is because holding excess inventories for a long time can tie up capital and increase storage costs. By selling the excess inventories, firms can generate revenue and free up space for new and more in-demand products.