In an economy that is experiencing a shrinking production capacity,
A) gross domestic investment is negative.
B) net private domestic investment is zero.
C) depreciation is negative.
D) depreciation exceeds gross investment.

Question

Quizplus · Accepted Answer

When the production capacity of an economy is shrinking, it means that the amount of capital goods (such as machinery and equipment) available for producing goods and services is decreasing over time. This implies that the amount of capital goods being used up (depreciated) is greater than the amount of new investment being made in these goods. Therefore, depreciation exceeds gross investment in this situation. Choices A and B are not true because gross domestic investment and net private domestic investment can still be positive despite a shrinking production capacity. Choice C is not true because depreciation is still occurring, just at a higher rate than new investment.

In an Economy That Is Experiencing a Shrinking Production Capacity