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