On the other hand his rul on patially these two,since the govemment can only run a deficit of a certain size,which might not be big enough Also.a cyclically ad justed balanced budget does not allow the government to smooth tax rates across years when expenditure is especially high or low,as in times of war or peace.(We might take account of this by allowing an exemption from the balanced budget rule in special circumstances such as war.)This rule does not allow the governmen t to overcome the third objectio raised in the chapter,since the government cannot shift the burden of expenditure from one generation to anothe when this is warranted.Finally,a serious problem with a rule requiring a balanced cyclically adjusted budget is that we do not directly observe this budget.That is,we need to estimate how far we are from full employment,then we need to estimate how taxes tthis full-employment of these estimates can be made precisely 10.List four reasons firms might hold inventories. 10.Reasons why firms might hold inventories include ing.A firm may hold inventories to smooth the level of produc. tion over time.Rather than adjust production to match fluctuations in sales,it may be cheaper to produce goods at a constant rate Hence the firm increases inventories when sales are low and decreases them when sales are high. b.Inventories as a factor of production.Holding inventories may allow a fimm to nore efficier mple,a retail store may hold ntories so that it acturing fimm may hold inventories of spare parts to reduce the time an assembly line is shut down when a machine breaks c.Stock-out avoidance A firm may hold inventories to avoid running out of goods when sales are ectedly high.Firms often ha e to make productiondec before knowing how much customers will dema Ifdema and exc s prod and there are no inventories,the good will be out of stock for a period,and the firm will lose sales and profit. d.Work in process Many goods require a number of steps in production and,there- oahelmeneTntoWhenaeinmoptieyimihodscoapo nents are nted s part of a fOn the other hand,this rule only partially overcomes these two objections,since the government can only run a deficit of a certain size,which might not be big enough. Also,a cyclically adjusted balanced budget does not allow the government to smooth tax rates across years when expenditure is especially high or low,as in times of war or peace.(We might take account of this by allowing an exemption from the balanced budget rule in special circumstances such as war.)This rule does not allow the government to overcome the third objection raised in the chapter,since the government cannot shift the burden of expenditure from one generation to another when this is warranted. Finally,a serious problem with a rule requiring a balanced cyclically adjusted budget is that we do not directly observe this budget.That is,we need to estimate how far we are from full employment;then we need to estimate how expenditures and taxes would differ if we were at this full-employment level.None of these estimates can be made precisely. 10. List four reasons firms might hold inventories. 10.Reasons why firms might hold inventories include: a.Production smoothing.A firm may hold inventories to smooth the level of produc￾tion over time.Rather than adjust production to match fluctuations in sales,it may be cheaper to produce goods at a constant rate.Hence,the firm increases inventories when sales are low and decreases them when sales are high. b.Inventories as a factor of production.Holding inventories may allow a firm to operate more efficiently.For example,a retail store may hold inventories so that it always has goods available to show customers.A manufacturing firm may hold inventories of spare parts to reduce the time an assembly line is shut down when a machine breaks. c.Stock-out avoidance.A firm may hold inventories to avoid running out of goods when sales are unexpectedly high.Firms often have to make production decisions before knowing how much customers will demand.If demand exceeds production and there are no inventories,the good will be out of stock for a period,and the firm will lose sales and profit. d.Work in process.Many goods require a number of steps in production and,there￾fore,take time to produce.When a product is not completely finished,its compo￾nents are counted as part of a firm’s inventory