Question

For each event, explain whether the initial effect is a change in planned investment spending or a change in unplanned inventory investment, and indicate the direction of the change.

A. an unexpected increase in consumer spending
B. a sharp rise in the interest rate
C. a sharp increase in the economy's growth rate of real GDP
D. an unanticipated fall in sales

Answer 1

Answer: A: An unexpected increase in consumer spending results in decreased inventories of those who produce the goods.

B: An increase in the interest rate is equal to an increase in borrowing costs, therefore, those producers who wish to invest will have fewer viable projects since the cost of obtaining capital will be higher.

C: A sharp increase in the economy's growth rate of real GDP has the consequence that producers increase their production capacity and have a higher investment expense.

D: an unanticipated fall in sales causes producer inventories to grow as they sell less, leading to unplanned excess inventories.