Chapter 16, Problem 5MCQ

To determine

The question requires us to determine the formula for actual investment spending.

Explanation of Solution

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.

In an economy, actual investment spending is the sum of planned investment and unplanned inventory investment in a given period. The following expression represents the relationship between these investments:

  ${\text{I=I}}_{\text{Planned}}{\text{+I}}_{\text{Unplanned}}$

Therefore, the actual investment spending equals the planned investment plus the unplanned inventory investment in a given period.

Option “a” is correct.