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Chapter 21: Q3 (page 566)

“Since inventories can be costly to hold, firms’ planned inventory investment should be zero, and firms should acquire inventory only through unplanned inventory

accumulation.” Is this statement true, false, or uncertain? Explain your answer

Short Answer

Expert verified

This statement is False

Step by step solution

01

Basic Concept 

Economy's desirable situation is when actual investment = planned investment.

This is ideal, as inventories level are appropriate as much as desired - neither more, nor less.

02

Explanation

So, firms tend to retain inventory according to planned inventory, in coordination with desired planned investment & with diligent cost consideration. They prefer planned inventory investment, rather than unplanned inventory accumulation.

Unplanned inventory investment is likely to be zero, or just little positive for contingencies & unforeseen events.

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Most popular questions from this chapter

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?

Go to the St. Louis Federal Reserve FRED database, and find data on Personal Consumption Expenditures (PCEC), Personal Consumption Expenditures: Durable Goods (PCDG), Personal Consumption Expenditures: Nondurable Goods (PCND), and Personal Consumption Expenditures: Services (PCESV).

a. Using the most recent data, what percentage of total household expenditures is devoted to the consumption of goods (both durable and nondurable goods)? What percentage is devoted to services?

b. Given these data, which specific component of household expenditures would be most impacted by a reduction in overall household spending? Explain.

If the consumption function is C = 100 + 0.75YD, I = 200, government spending is 200, and net exports are zero, what will be the equilibrium level of output?

What will happen to aggregate output if government spending rises by 100?

Go to the St. Louis Federal Reserve FRED database, and find data on Real Private Domestic Investment (GPDIC1), a measure of the real interest rate; the 10-year Treasury Inflation-Indexed Security, TIIS (FII10); and the spread between Baa corporate bonds and the 10-year U.S. treasury (BAA10YM), a measure of financial frictions. For (FII10) and (BAA10YM), convert the frequency setting to “quarterly,” and download the data into a spreadsheet. For each quarter, add the (FII10) and (BAA10YM) series to create ri , the real interest rate for investments for that quarter. Then calculate the change in both investment and ri as the change in each variable from the previous quarter.

a. For the eight most recent quarters of data available, calculate the change in investment from the previous quarter, and then calculate the average change over the eight most recent quarters.

b. Assume there is a one-quarter lag between movements in ri and changes in investment; in other words, if ri changes in the current quarter, it will affect investment in the next quarter. For the eight most recent lagged quarters of data available, calculate the onequarter-lagged average change in ri .

c. Take the ratio of your answer from part (a) divided by your answer from part (b). What does this value represent? Briefly explain.

d. Repeat parts (a) through (c) for the period 2008:Q3 to 2009:Q2. How do financial frictions help explain the behavior of investment during the financial crisis? How do the coefficients on investment compare between the current period and the financial crisis period? Briefly explain.

In each of the following cases, determine whether the IS curve shifts to the right or left, does not shift, or is indeterminate in the direction of shift.

a. The real interest rate rises.

b. The marginal propensity to consume declines.

c. Financial frictions increase.

d. Autonomous consumption decreases.

e. Both taxes and government spending decrease by the same amount.

f. The sensitivity of net exports to changes in the real interest rate decreases.

g. The government provides tax incentives for research and development programs for firms.
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