Profits hit by rate rises Essay Example | Topics and Well Written Essays - 500 words

Profits hit by rate rises - Essay Example The increase in the accumulation of inventories however reduces the GDP as firms tend to avoid the "overhang of unsold inventories" as mentioned in the article. As real GDP converges to equilibrium i.e. aggregate planned expenditure starts to match real GDP, than the inventories of the firm start to draw down. If we take the scenario where inventories start to accumulate, a drift towards equilibrium would suggest that the planned expenditure exceeds real GDP hence in order to adjust the planned expenditure in line with the real GDP, inventories will start to reduce As discussed above, there are two components of aggregate expenditure i.e. autonomous expenditure and induced expenditures. Autonomous, investments, exports expenditure include government spending as well as autonomous consumption. The induced expenditure most involves private consumption including imports, savings, consumer expenditure etc. The autonomous expenditure does not vary with the changes in the real GDP therefore there is a very little impact of interest rises on this type of expenditure in short run. However, induced expenditure gets affected by the series of rises in interest rates.