U.S. business inventories increase
Business inventories in the United States rose 0.4% in July after no change in the prior month. An increase in inventories adds to gross domestic product while a decrease subtracts from it.
Source: U.S. Department of Commerce, September 13, 2019
Explain why an increase in inventories adds to gross domestic product but why it matters whether an increase in inventories is planned or unplanned.
A planned increase in inventories _______.
A.
decreases investment, which decreases equilibrium expenditure and real GDP
B.
increases investment, which increases equilibrium expenditure and real GDP
C.
shifts the AE curve
upward,
so firms decrease production and real GDP decreases to reach equilibrium expenditure
D.
shifts the AE curve
downward,
so firms decrease production and real GDP decreases
E.
increases consumption expenditure, which increases equilibrium expenditure and real GDP
An unplanned increase in inventories _______.
A.
occurs when real GDP exceeds aggregate planned expenditure, so firms increase production and real GDP increases
B.
occurs when real GDP exceeds aggregate planned expenditure, so firms decrease production and real GDP decreases
C.
increases investment, which increases equilibrium expenditure and real GDP
D.
occurs when aggregate planned expenditure exceeds real GDP, so firms decrease production and real GDP decreases
E.
occurs when aggregate planned expenditure exceeds real GDP, so firms increase production and real GDP increas