An increase in inventories will increase which component of gross domestic product (GDP)?

• A. Consumption
• B. Net exports
• C. Government spending
• D. Investment

Answer: (D)

Verified step by step guidance

1. Understand the components of Gross Domestic Product (GDP), which are Consumption (C), Investment (I), Government Spending (G), and Net Exports (NX). The GDP identity is given by: \[ GDP = C + I + G + NX \]
2. Recognize that 'Investment' in GDP includes business expenditures on capital goods, residential construction, and changes in inventories. Changes in inventories represent goods produced but not yet sold.
3. Analyze how an increase in inventories affects GDP: since inventories are part of investment, an increase in inventories means that investment spending has increased.
4. Confirm that consumption, government spending, and net exports do not directly include changes in inventories, so an increase in inventories does not affect these components.
5. Conclude that an increase in inventories will increase the 'Investment' component of GDP.