Chapter 16, Problem 4CYU

a)

To determine

The question requires us to determine the factor that causes a change in planned investment, and unplanned investment, and indicate the direction of the change.

Explanation of Solution

When consumer spending increases unexpectedly, the demand for goods and services rises and reflects a fall in the inventory stock of the firms because firms will use their inventory stocks to satisfy this higher demand. So, the unplanned inventory investment will fall due to a fall in the inventory stocks.

Economics Concept Introduction

Investment has two major components:

1. Planned investment: The intended investment undertaken by the firms during a given financial period is considered a planned investment in an economy.
2. Unplanned inventory investment: Inventories are stocks of unsold intermediate goods and final goods. Any changes in the stock of inventories are considered inventory investments. An unexpected fall and rise in inventory investments are considered unplanned inventory investments in an economy.

b)

To determine

The question requires us to determine the factor that causes a change in planned investment, and unplanned investment, and indicate the direction of the change.

Explanation of Solution

A sharp rise in the interest rate hikes the borrowing costs to the firms by a large extent and thus discourages the firms to make investments. As a result, the planned industry in the firm will fall.

c)

To determine

The question requires us to determine the factor that causes a change in planned investment, and unplanned investment, and indicate the direction of the change.

Explanation of Solution

An increase in real GDP growth indicates a higher level of aggregate demand in the market. To meet the aggregate demand, the firms will increase their production capacity which needed a higher level of investment in capital and human resources. So, firms will increase planned investment.

d)

To determine

The question requires us to determine the factor that causes a change in planned investment, and unplanned investment, and indicate the direction of the change.

Explanation of Solution

An unexpected fall in sales reflects a higher level of leftover stocks of inventories in form of intermediate and final products. These inventories will be considered positive unplanned inventory investments in the firm in the next period. So, the unplanned inventory investment will increase.