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During contraction, producers initially fail to cut output promptly. What immediate consequence does the chapter attribute to this lag?
ASupply comes to far exceed demand
BDemand permanently exceeds supply
CInput prices climb to record highs
DBank credit expands to fund stocks
Answer & Solution
Correct answer: A. Supply comes to far exceed demand
1. The text says producers do not instantly recognise the turn and keep anticipating higher demand.
2. They maintain existing investment and production levels.
3. The result is a mismatch where supply far exceeds demand.
4. So the correct consequence is that supply exceeds demand.
5. "Demand exceeds supply" is ruled out: it is demand that falls short, not exceeds, supply.
6. "Input prices at record highs" and "credit expands" are ruled out: input prices fall and credit shrinks in contraction.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 5 "Business Cycles", p.2_
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