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Chapter 21: Q 12. (page 566)

“Firms will increase production when planned investment is less than (actual) total investment.” Is this statement true, false, or uncertain? Explain your answer.

Short Answer

Expert verified

This statement is False

Step by step solution

01

Step 1. Introduction

If Actual Investment is more than planned investment, then inventories level rise - as inventories are a part of investment expenditure.

This implies that inventory level is above the desired ideal inventory level.

02

Explanation

Actual Investment more than planned investment & subsequent more inventory leads to firm's desire to reduce investment, inventory. So, they reduce (Not Increase) the level of production to get rid of the excess inventory & more investment.

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Most popular questions from this chapter

During and in the aftermath of the financial crisis of 2007–2009, planned investment fell substantially despite significant decreases in the real interest rate.

What factors related to the planned investment function could explain this?

Assume that autonomous consumption is \(1,625 billion and disposable income is \)11,500 billion. Calculate consumption expenditure if an increase of \(1,000 in

disposable income leads to an increase of \)750 in consumption expenditure

Suppose you read that prospects for stronger future economic growth have led the dollar to strengthen and stock prices to increase.

a. What effect does the strengthened dollar have on the IS curve?

b. What effect does the increase in stock prices have on the IS curve?

c. What is the combined effect of these two events on the IS curve?

Consider an economy described by the following data:

C=\(3.25trillionI=\)1.3trillionG=\(3.5trillionT=\)3.0trillionNX=-\(1.0trillionf=1

mpc = 0.75

d = 0.3

x = 0.1

a. Derive simplified expressions for the consumption function, the investment function, and the net export function.

b. Derive an expression for the IS curve.

c. If the real interest rate is r = 2, what is equilibrium output? If r = 5, what is equilibrium output?

d. Draw a graph of the IS curve showing the answers from part (c) above.

e. If government purchases increase to \)4.2 trillion, what will happen to equilibrium output at r = 2? What will happen to equilibrium output at r = 5? Show the effect of the increase in government purchases in your graph from part (d).

Why do companies cut production when they find that their unplanned inventory investment is greater than zero? If they didn’t cut production, what effect would

this have on their profits? Why?
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