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THE AGGREGATE EXPENDITURES MODEL - Coggle Diagram
THE AGGREGATE EXPENDITURES MODEL
STICKY PRICE
The aggregate expenditures model views the total amount of spending in the economy as the primary factor determining the level of real GDP that the economy will produce.
The model assumes that the price level is fixed.
INVESTMENT SCHEDULE
Shows how much investment the firms in an economy are collectively planning to make at each possible level of GDP.
PRIVATE CLOSED ECNOMY
Two Components
Consumption [C]
Spending by households on consumer goods
Gross Investment [Ig]
The amount a company has invested in an asset or business without factoring in depreciation
In developing the investment schedule, we will assume that this planned investment is independent of the level of current disposable income or real output.
Investment Schedule
An investment schedule shows the amounts business firms collectively intend to invest - their planned investment – at each possible level of GDP.
GDP
The aggregate expenditure is one of the methods that is used to calculate the total sum of all the economic activities in an economy, also known as the gross domestic product (GDP).
The gross domestic product is important because it measures the growth of the economy.
The GDP is calculated using the Aggregate Expenditures Model.
DISEQUILIBRIUM
When there is excess supply over the expenditure, there is a reduction in either the prices or the quantity of the output which reduces the total output (GDP) of the economy.
When there is an excess of expenditure oversupply, there is excess demand which leads to an increase in prices or output (higher GDP). A rise in the aggregate expenditure pushes the economy towards a higher equilibrium and a higher potential of the GDP.
AGGREGATE EXPENDITURES
consist of :
consumption
plus investment
EQUILIBRUIM
An economy is at equilibrium when aggregate expenditure is equal to the aggregate supply (production) in the economy.
The economy is not in a constant state of equilibrium
The aggregate expenditure and aggregate supply adjust each other toward equilibrium.
SAVINGS EQUALS PLANNED INVESTMENT
SAVINGS
Saving is a leakage or withdrawal of spending from the economy’s circular flow of income and expenditures
Saving is what causes consumption to be less than total output or GDP
INVESTMENT
Investment—the purchases of capital goods—is therefore an injection of spending into the income expenditures stream.
Investment is thus a potential replacement for the leakage of saving