The Aggregate Expenditures Model For Closed Economies. (Equilibrium GDP…
The Aggregate Expenditures Model For Closed Economies.
Assumptions and Simplifications
Prices are fixed
GDP = DI
Keynesian Aggregate Expenditures Model
Private Closed Economy
Consumption and Investment
Relationship between investment and Real GDP
GDP increases as investment increases
Investment Demand Curve
Negative/Inverse relationship between interest rates and investment.
Borrowing becomes easier/cheaper when interest rate falls, generating a higher demand for investment.
Income is equal to output.
Consumption levels direct relationship with income
Investment is independent of income
Output that produces total spending sufficient enough to purchase at a certain level of output.
Otherwise situation is disequilibrium.
Only sustainable level of GDP.
Savings and planned investment are equal at Equilibrium GDP
Investment is injection of spending
Savings is leakage of spending
No unplanned changes in inventories
No change in production by firms