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Unit 5 - Coggle Diagram
Unit 5
Aggregate Expenditures Model (closed economy)
Assumptions and Simplifications
Use Keynesian aggregate expenditures model
Prices in economy are fixed
Stuck-price model
Price level cannot change
Helps us understand how modern economy is likely to adjust to economic shocks over short period of time
Begin with private, closed economy
Investment spending
Interest Rate
Investment schedule
Planned Investment
What firms collectively intend to invest at each level of GDP
Relationship between Investment and Real GDP
Horizontal line
If investment increase Real GDP will increase
If investment decrease Real GDP will decrease
Investment Demand curve
Negative relationship
Based upon real rate of interest
when interest rate decrease the demand for investment increases
Downward sloping line
Independant of Income
Gross investment (Ig)
Aggregate expenditures schedule
Disequilibrium
Less than equilibrium
GDP is below equilibrium firms will increase production
unplanned decline in business inventories
1 more item...
Greater than equilibrium
GDP is above equilibrium firms will decrease production
unplanned increase in business inventories
1 more item...
No level of GDP other than equilibrium GDP can be sustained
Because C + Ig falls short of GDP
Equilibrium level of output
level of GDP at which total quantity produced equals total quantity purchased
no excess of total spending
no planned increase in inventories of goods
No need for businesses to alter their rate of production
C+Ig = GDP
no unplanned changes in inventories
Real domestic output
Will produce at any level where Revenue equals or exceeds the costs
GDP=DI
Lists various possible levels of total output - of real GDP-might produce
Aggregate expenditure
=( C + Ig )
Equilibrium GDP
Saving equals planned Investment
Savings is a leakage of spending from the economy
Savings causes consumption to be less than GDP
2 more items...
Investment
Investment is an injection of spending into income-expenditures steam
1 more item...
Actual investment
1 more item...
Without international trade and government spending
Consumption spending
Directly related to level of income
C
Adding International trade
Move from a private closed to private open economy
Incorporates exports (X) and imports (M)
Net exports
Exports minus imports
Net Export schedule
Amount of net exports that will occur at each level of GDP
Positive Net exports
Other things equal
1 more item...
Negative Net exports
Other things equal
1 more item...
Private open economy
Aggregate expenditures
C +Ig + (X-M)
C + Ig +Xn
Adding the Public sector
Move from private open economy to a mixed economy
Assume that government purchases are independent of level of GDP
Do not alter C or Ig
Adding government purchases and taxes
(C+Ig +Xn + G)
Taxation and equilibrium GDP
Lump-sum tax
Tax of a constant amount
Same amount of tax revenue at each level of GDP
Private Closed economy
Without international trade and government spending
Private open economy
Includes international trade but not government spending
Mixed economy
Includes international trade and government spending