1. If households decide to save more, saving in the aggregate may fall. Explain this in words.
2. Suppose that in the year 2010, Celestial Electronics planned to produce 950,000 units of its portable GPS devices. Of the 950,000 it planned to produce, a total of 25,000 units would be added to the inventory at its new plant in Florida. Also assume that these units have been selling at a price of $100 each and that the price has been constant over time. Suppose further that this year the firm built a new plant for $5 million and acquired $2.5 million worth of equipment. It had no other investment projects, and to avoid complications, assume no depreciation.
Now suppose that at the end of the year, Celestial had produced 950,000 units but had only sold 900,000 units and that inventories now contained 50,000 units more than they had at the beginning of the year. At $100 each, that means that the firm added $5,000,000 in new inventory.
a. How much did Celestial actually invest this year?
b. How much did it plan to invest?
c. Would Celestial produce more or fewer units next year? Why?