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Question:

If economic data suggest that the economy is undergoing an expansion caused by an increase in aggregate demand (AD), investors should least likely increase their investments in:

A Defensive companies.
Explaination

If economic data suggest that the economy is undergoing an expansion caused by an increase in AD, going forward corporate profits will be expected to rise, commodity prices will be expected to increase, interest rates will be expected to rise, and inflationary pressures will build in the economy. Therefore, investors should:
• Increase investments in cyclical companies as their earnings would rise significantly in this scenario.
• Increase investments in commodities and/or commodity‐oriented companies.
• Reduce investments in defensive companies, as their profits would not rise as significantly as those of cyclical companies.