Decrease in Business Inventories Slow Investment Growth

Answer the following questions to check your understanding of the story.

What is weaker external demand?

Weaker external demand is a decrease in __________.

a) domestic consumption

b) imports

c) exports

d) business investment

Wrong! - Business investment is spending done by firms and households (on new homes only). It is not a part of external demand. Domestic demand for foreign goods—imports—is external supply. Does external demand refer to spending by households on domestic goods?

Good Job! - External demand is the foreign demand for domestic goods—exports. Weaker external demand is a decrease in exports.

Where in the National Income and Product Accounts does a decrease in business inventories appear?

A decrease in business inventories appears as a negative component of ____________.

a) personal consumption expenditures

b) gross private domestic investment

c) as a positive entry in government expenditure on goods and services

d) exports

Wrong! - Business inventories are not a component of exports, consumption expenditures or government expenditure on goods and services.

That's Right! - Changes in business inventories are part of gross private domestic investment: additions are positive entries and decreases are negative entries.

Was the decrease in business inventories planned or unplanned, and how can we know?

The decrease in business inventories was ___________ and we know because a decrease in autonomous expenditure (exports) brings ____________ in business inventories.

a) planned; an unplanned increase

b) unplanned; a planned increase

c) unplanned; an unplanned increase

d) planned; a planned decrease

Wrong! - If exports decrease, won’t firms sell less than they had planned? Would the resulting change in inventories be planned? Would the unplanned inventories decrease? Facing weaker demand, won’t firms decide to sell those inventories? Would that decrease be unplanned?

Well Done! - As exports decreased, firms sold less than they had planned, which led to an unplanned increase in inventories. Facing weaker demand, firms then decided to sell those inventories, resulting in a planned decrease in inventories.

Does the news clip describe the expenditure multiplier at work?

a) Yes, an increase in autonomous expenditure increases aggregate demand, which is followed by a further increase in aggregate demand due to an increase in induced expenditure.

b) No, decrease in exports brings unplanned increase in business inventories, which induces a further decrease in output.

c) Yes, a decrease in autonomous expenditure decreases aggregate demand, which is followed by a further decrease in aggregate demand due to a decrease in induced expenditure.

d) No, a decrease in exports brings unplanned decrease in business inventories, which induces a further increase in output.

Wrong! - A multiplier effect is at work when a when a change in autonomous expenditure (a decrease in exports, in this case), brings changes in induced expenditure. Is the decrease in inventories an induced expenditure? Does the news clip describe an increase in exports, an autonomous expenditure?

Correct! - A multiplier effect is at work when a when a change in autonomous expenditure (a decrease in exports, in this case), brings changes in induced expenditure.

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