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The Aggregate Expenditure Model for a Closed Private Economy - Coggle…
The Aggregate Expenditure Model for a Closed Private Economy
Model
Assumptions
Production decisions made in response to unplanned Inventory adjustments
Stuck price model
Current relevance
How economy adjusts to economic shocks in short period of time
Components of aggregate expenditure
Consumption (C)
Derived from consumption schedule
Gross Investment (Ig)
Investment schedule
Investment (from investment demand curve)
GDP
Investment demand curve
Investment
Interest rate
GDP
Equilibrium GDP
C+Ig = real GDP
Quantity produced (GDP) = quantity purchased (C+Ig)
Features of equilibrium GDP
Savings = planned investment
No unplanned changes inventories
Disequilibrium GDP
real GDP level < C+Ig
Employement, output and income increase
Injection of investment exceeds savings
real GDP level > C+Ig
Employment, output and income decrease
Savings exceed investment