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AGGREGATE EXPENDITURES MODEL, GDP Equilibrium, Multiplier Effect,…
AGGREGATE EXPENDITURES MODEL
Assumptions
Stuck Price Model : Prices are fixed
Production decisions are made in response to unexpected changes in inventory levels
Other features of equilibrium GDP
Savings & Planned Investment are equal
(S = Ig)
No unplanned changes in inventories
Consumption and Investment Schedules
Aggregate Expenditures = Consumption
(C)
+ Gross Investments
(I)
Planned investment : firms collectively intend to invest
Equilibrium GDP (C + Ig = GDP)
Changes in equilibrium GDP & the multiplier
Size of Multiplier depends on size of MPS in economy : Multiplier = 1 :heavy_division_sign: MPS
Changes in Aggregate Expenditures model and Multiplier Effect
Multiplier = change in real GDP :heavy_division_sign: initial change in spending
:heavy_plus_sign: International Trade (Private Open Economy)
In a private open Economy : Aggregate Expenditure = C + Ig + Xn
Positive Net Exports : :arrow_double_up:aggregate expenditure & :arrow_double_up:Equilibrium GDP
Net Exports (Xn) = X (exports) - M (Imports)
Negative Net Exports : :arrow_double_down:aggregate expenditure & :arrow_double_down:Equilibrium GDP
Changes that affect Net Exports (Xn)
:warning:Prosperity abroad
:warning:Tariffs
:warning:Exchange rates
:heavy_plus_sign: Public sector (Mixed Economy)
Equilibrium vs Full Employment GDP
Recessionary expenditure Gap
Inflationary expenditure Gap
