Explain the difference between planned and actual investment in the economy. Why is the distinction important?
What will be an ideal response?
Actual investment consists of both planned investment and changes in inventories. Unplanned changes in inventories act as a balancing item which equates the actual amounts saved and invested in any period. At above equilibrium levels of GDP, saving is greater than planned investment, and there will be an unplanned increase in inventories. At below equilibrium levels of GDP, planned investment is greater than saving, and there will be an unplanned decrease in inventories. Equilibrium is achieved when planned investment equals saving, and there are no unplanned changes in inventories.
You might also like to view...
According to this Application, during the late 1980s, Argentina pegged its currency to the U.S. dollar. After 1995, the U.S. dollar appreciated sharply on world markets. Since the Argentinean peso was pegged to the U.S
dollar, the appreciation of the dollar essentially caused A) the peso to appreciate relative to the dollar, but depreciate on world markets. B) a sharp devaluation of the dollar relative to the peso. C) a severe revaluation of the peso relative to the dollar. D) the peso to also appreciate sharply on world markets.
Which of the following is NOT a reason social returns might be greater than private returns?
A) Excess competition between firms B) Knowledge spillovers C) Spillovers from research and development D) Capital market imperfections