Answer to Question #208160 in Macroeconomics for tev

Question

1)   With reference to the simple accelerator, explain the behaviour of inventory investment when the economy starts to recover 

Answer 1

When the economy begins to improve, inventory sales may exceed production, resulting in low inventory-to-sales ratios. To get the ratio back to normal, businesses must stockpile more inventory. Therefore demand or income rises, investment spending rises as well. Companies can either reduce demand by raising prices or expand investment to satisfy the amount of demand if there is excess demand.