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Unit 5: The Aggregate Expenditures Model (Closed Economy) - Coggle Diagram
Unit 5: The Aggregate Expenditures
Model (Closed Economy)
Assumptions and Simplifications
Begin with private, closed economy
Consumption spending
Investment spending
GDP DI
Prices are fixed
Use the Keynesian aggregate expenditures model
Consumption and Investment
Investment Demand Curve
Investment Schedule
Forthcoming investment amount at each level of GDP
Determined by and based upon real rate of interest
Planned Investment
Unplanned Investment
Actual Investment = Planned + Unplanned Investment
Equilibrium GDP
Savings = Planned Investment
Aggregate consumption = GDP
Sufficient spending to buy total output
Desired level of output
Total output produced = Total output purchased
Other Features of Equilibrium GDP
No unplanned changes in inventories
Firms do not change production
Saving equals planned investment
Saving is leakage of spending
Investment is an injection of spending
Disequilibrium
GDP above equilibrium level
Firms decrease production rate
Injection of spending < Leakage of spending
Productive resources in surplus
GDP below equilibrium level
Investment > Savings
Firms increase production rate
Enhanced employment, resultant rising consumption and income levels