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Chapter 31 The Aggregate Expenditure Model (Equilibrium Point (Less than…
Chapter 31
The Aggregate Expenditure Model
Developed by
John Maynard Keynes, during the great depression.
Investment Demand Curve
depicts the dollar value of investment projects demanded for every given interest rate.
slopes downward as interest rate increases. "borrowed money"
This schedule depicts the relationship between INVESTMENT and the level of NATIONAL INCOME.
Forms of the Model
Private, closed
Excludes the use of:
Governments
Net Exports
Is the sum of
consumption and Investment
GDP = C + Ig
Open
Includes the use of
Governments
Net Exports
GDP = C + Ig + G + NX
Is the total sum of all GDP
factors i.e. (consumption, investment
government, Net exports)
Equilibrium Point
Less than EP =
Spending is GREATER than Output
Results in Inventories depleting faster then production.
Production will increase as will;
employment.
Greater than EP =
Spending is
less
then output
Results in Inventories standing still.
Production will decrease as will;
employment.
EP in the closed Private model : Saving = investment
Disequilibrium
GDP less than Equilibrium = Spending
exceeds production (inflation).
GDP greater than Equilibrium = production
exceeds consumption (unemployment)
