Excluding the inventory component, which of the following statements is accurate?
A) Gross investment must be nonnegative, but net investment must be negative if the desired level of capital is smaller than last year's capital stock.
B) Gross investment can be either positive or negative, but net investment must be negative as long as the desired level of capital is smaller than last year's capital stock.
C) Gross investment must be nonnegative, but net investment can be negative or positive if the desired level of capital is smaller than last year's capital stock.
D) Gross investment must be nonnegative because net investment must always be positive.
E) None of the above.

Question

Quizplus · Accepted Answer

Gross investment refers to the total amount spent on new capital, and it must be nonnegative because spending cannot be less than zero. Net investment, which is gross investment minus depreciation, can indeed be negative or positive depending on whether the economy is adding to its capital stock or if the capital stock is shrinking. If the desired level of capital is smaller than last year's capital stock, it implies that the economy might not be adding to its capital stock (possibly due to high depreciation or deliberate reduction), hence net investment can be negative.

Excluding the Inventory Component, Which of the Following Statements Is