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Aggregate expenditures model in a closed economy - Coggle Diagram
Aggregate expenditures model in a closed economy
Keynesian cross model
The amount of goods and services produced and level of employment depend directly on the level of aggregate expenditures.
Developed in the great depression to explain why it happened and how it might be ended.
Stuck price model
Extreme version of sticky price model
Assumption that prices are fixed
Price level cannot change at all
Observed that prices had not sufficiently declined to boost spending and maintain output and employment.
Unplanned inventory adjustments
Firms acted in a predictable way to unplanned adjustments
Stock up if rapid future sales are expected
Decrease inventory if declined demand is expected
Production decisions are made in response to unexpected changes in inventory levels
Rising inventory levels
Firms cut back on production
Falling inventory levels
Firms increase production
Private closed economy
Lacks international trade and government
Includes businesses and households
Assume excess production capacity and unemployed labour
Increase in aggregate expenditures
Increase real output and employment
Without raising price level
Consumption and investment schedules
Consumption (C)
Gross Investment (Ig)
Planned investment = The amount that firms plan or intend to invest
Investment schedule (Ig)
Planned investment at each level of GDP
Assume planned investment is independent of current level of disposable income or real output
Investment demand curve (ID)
How much investment firms plan to make at each interest rate
Equilibrium GDP: C+Ig=GDP
Aggregate expenditures
Consist of consumption plus investment
Equilibrium GDP
Occurs when total quantity of goods produced (GDP) = Total quantity of goods purchased (C + Ig)
No overproduction resulting in excess inventories and cutbacks in production
No excess in total spending, drawing down inventories leading to prompt production increases.
Real domestic output
Lists possible levels of total output
Firms will produce at each level as long as output equals or exceeds costs of production
Disequilibrium
No level other than equilibrium is sustainable
Levels below equilibrium lead to a increase tendency of employment, output and income
Levels above equilibrium lead to a decreased tendency of employment, output and income
