Chapter 31 - The Aggregate Expenditures Model (Equilibrium GDP (Tabular…
Chapter 31 - The Aggregate Expenditures Model
Consumption and Investment Schedule
Private Closed Economy
- is an economy without a government or international trade
- graphically illustrates the relationship between consumption and disposable income.
- represents the amounts that firms plan to invest at various possible values of real GDP (gross domestic product). Shows the amount of investment that will be spent at each level of GDP.
Assumptions and Simplifications
Aggregate Expenditures Mode
l - determines the total amount that firms and households plan to spend on goods and services at each level of output.
The economy's prices are fixed.
GDP equals DI (disposable income)
Real Domestic Output
- various levels of real GDP
- total quantity of goods produced (GDP) equals total quantity of goods purchased (C + Ig).
- consumption plus investment
- when the GDP levels are more or less than the equilibrium
On the 45 degree line, the vertical values of the x-axis are equal to the horizontal values of the y-axis.
Other Features of Equilibrium GDP
Characteristics of Equilibrium:
Savings and planned investments are equal (S = Ig)
There are no unplanned changes in inventories
Saving equals planned investment
- is the portion of income not spent on current expenditures.
- approach to increase finance in economy