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The Aggregate Expenditures Model (Closed Economy) - Coggle Diagram
The Aggregate Expenditures
Model (Closed Economy)
Assumptions and Simplifications
Use the Keynesian aggregate expenditures model
Prices are fixed
GDP = DI
Begin with private, closed economy
Consumption spending
Investment spending
Equilibrium GDP
Saving equals planned investment
Saving is a leakage of spending
Investment is an injection of spending
No unplanned changes in inventories
Firms do not change production
Non Equilibrium
Firms decide how much real output to produce in response to unexpected changes in inventories levels.
if spending is unexpectedly low
inventories will rise causing firms to cut back production
if spending is unexpectedly high
inventories will fall causing firms to increase production
IG shows the amount of investments forthcoming at each level of GDP
ID shows how much firms plan to invest at each interest rate