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Aggregate Expenditure Model - Coggle Diagram
Aggregate Expenditure Model
Stuck Price Model
Assumptions that prices are fixed
Extreme version of a sticky price model
Keynes created this during the Great Depression
Unplanned Inventory Adjustments
Firms reacted in a predictable way to unplanned increases in inventory levels
Assumption that it allows it to achieve equilibrium
This is very relevant today because of prices that are very inflexible over time
Consumption and Investment Schedules
The two components in a private closed economy is Consumption and GROSS investment
We should construct an investment schedule to show what businesses wil intend to invest at each level of GDP
The level of investment spending is determined by the real interest rate together with the incestmnet demand curve
The investment schedule relates the amount of investment at the various levels of GDP
Equilibrium GDP
Formula is C(Consumption) + Ig(Gross Investment)
Domestic Output is shown in Column 2 at each level of GDP. Frirms are willing to selling that particular amount as long as output >= to costs of producing it
Aggregate Expenditures is shown in Coloumn 6. What is C + Ig Shows the amount spent at each possible output income level
GDP what is the outcome the economy capble of sustaining
Graphical Analysis
Disequilibrium
At levels where GDP is less than equilibrium, spending always exceeds GDP.
Spending More than Suffixient Purchase
At levels where GDP is more than equilibrium Fails to to generate the spending to clear the shelves of good
Other features
Saving Equals Planned Investment
No unplanned Changes in Inventories
