Decreases in production are preceded by increases in business inventories. Incre

Question

Decreases in production are preceded by increases in business inventories.

Increases in inflation are preceded by increases in business inventories.

If aggregate demand unexpectedly decreases, business inventories will increase.

1.Which of the following would be true about business inventories?

Decreases in production are preceded by increases in business inventories.

Increases in inflation are preceded by increases in business inventories.

If aggregate demand unexpectedly decreases, business inventories will increase.

I only. II only. III only. I and II only. I and III only.

Explanation / Answer

(1) Option (5)

When business inventory is high, firms are unable to sell all they produce, so they decrease production (statement I is correct). When aggregate demand decreases,  firms are unable to sell all they produce, so inventory increases (statement III is correct).

(2) Option (2)

When demand for loanable funds is higher then supply of loanable funds, there is an excess demand for loanable funds which will increase interest rate.

(3) Option (2)

If potential borrowers do not take loans, the credi creation process slows down due to this leakage.

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