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CFA Level I · CFA Level I Exam · Understanding Business Cycles

An analyst observes that inventory-to-sales ratios have risen sharply as sales growth slowed, and firms respond by cutting production below the level of sales. This behavior is most likely to:

Cutting production below sales to work off excess inventories most likely amplifies the near-term slowdown in output, because production falls by more than sales. Inventory reduction subtracts from GDP rather than adding to it, and slowing sales with excess stock do not indicate inflationary late-expansion conditions.

  1. Aamplify the slowdown in output in the near term as inventories are worked downCorrect
  2. Braise real GDP growth immediately because inventories add to final demand
  3. Csignal the start of the late expansion phase with rising inflationary pressure

Explanation

When firms cut production below sales to reduce excess inventory, output falls by more than sales, deepening the slowdown in the short run. Inventory accumulation, not drawdown, adds to GDP, so the second option reverses the effect. Rising inflationary pressure is not what slowing sales and excess stocks indicate.

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