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Chapter 31: The Aggregate Expenditures Model - Coggle Diagram
Chapter 31:
The Aggregate Expenditures Model
The two most important questions in macroeconomics:
(i) How is an economy's output measured?
(ii) Why does an economy grow?
To find the answers, we can construct the aggregate expenditures model
Aggregate expenditures model, also known as the "Keynesian Cross" model, was developed by British economist John Maynard Keynes
The basic premise is that the amount of goods and services produced and, therefore, the level of employment depend directly on the level of aggregate expenditures (total spending).
Most fundamental assumption: Prices in the economy are fixed and thus cannot be changed.
The keynesian aggregate expenditures model is insightful because:
It clarifies aspects of the severe 2007-2009 U.S recession like why unexpected initial declines in spending caused even larger declines in real GDP.
It helps us to understand the thinking behind stimulus programs (tax cuts and government spending) enacted by the government during times of recession
It can help us understand how the modern economy is likely to initially adjust to various economic shocks over shorter periods of time.
It helps us to understand the affects of the many prices in the modern economy that are inflexible downward over relatively short periods of time.
The aggregate expenditures model in the private closed economy
Aggregate Expenditures
Two components of aggregate expenditures
(ii) Gross investment (Ig)
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(i) Consumption (C)
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Equilibrium GDP: C + Ig = GDP
Annual rates of spending and production are in balance
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Graphical analysis
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Savings and planned investment are equal: S = Ig
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There are no unplanned changes in inventories
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Disequilibrium:
Levels of GDP less than equilibrium
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Levels of GDP greater than equilibrium
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