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The Aggregate Expenditures Model (Closed Economy) - Coggle Diagram
The Aggregate Expenditures Model (Closed Economy)
Equilibrium
At equilibrium savings = investments
The equilibrium output is that output whose production creates total spending just sufficient to purchase that output
Consumption + Investment = Aggregate Expenditure = GDP
At equilibrium there is no unplanned overproduction to increase stock piles nor unplanned underproduction to decrease stock piles.
Equilibrium GDP is the level where total goods produced = the total of goods purchased
Consumption and Investment
Consumption - the total spend of individuals in an economy on goods and services
Investment - the level of investment spending by firms is based upon the real interest rate together with the investment demand curve
The
investment demand curve
and the real interest rate together determine the amount of investment spending
The
investment schedule
shows the amount of investment forthcoming at each level of GDP
Created by John Maynard Keynes (1883 - 1946)
In response to the failing of existing models during the great depression which started in 1929.
Developed in the 1930's
Developed to encourage government to increase expenditures to stimulate the economy during and after the Great Depression
Assumptions
GDP = DI
Private closed economy
Prices are fixed