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

At the start of an economic slowdown, retailers see sales fall below expectations. The inventory-to-sales ratio most likely:

The inventory-to-sales ratio most likely rises. When sales unexpectedly weaken, unsold goods accumulate before firms can cut orders and production. The ratio increases until firms reduce output to work off the excess inventory, which then amplifies the downturn.

  1. Afalls as retailers sell stock faster than they reorder
  2. Brises as unsold goods accumulate before production is cutCorrect
  3. Cstays constant because firms adjust orders instantly

Explanation

When sales fall unexpectedly, inventories build up before firms can reduce orders and production, so the ratio of inventory to sales rises. Firms then cut production to work down stock, deepening the slowdown.

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