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Aggregate expenditures model of a closed economy (Assumption is that price…
Aggregate expenditures model of a closed economy
Aggregate expenditure model:
Amount of Goods and Services produced in the economy and the level of employment depends directly on total spending
Assumption is that price remains fixed
The assumptions purpose is to help us understand what caused the great depression, and what ended it
Assume: GDP = DI
Assume all saving is personal savings
GDP
No level of GDP except the equilibrium level of GDP is sustainable
Equilibrium GDP means
No unplanned changes in inventory
Savings = Planned Investment
C +Ig
Ig = Investment schedule
C = consumption
Investment Demand curve
The relationship between interest rates and investments
negative relationship meaning as the interest rate goes up, investments go down.
Demand schedule
Relationship between investment and real GDP
As one increases so does the other. Creating a horizontal line