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Unit 5 - The Aggregate Expenditures model, - - Coggle Diagram
Unit 5 - The Aggregate
Expenditures model
ASSUMPTIONS AND SIMPLIFICATIONS
Keynes created the aggregate expenditures
model in the middle of the great depression,
hoping to explain both why the great depression
had happened and how it might be ended,
Unplanned inventory adjustments:
To keynes, the great depressions massive
unemployment of labor and capital was caused
by firms reacting in a predictable way to unplanned
increases in inventory levels.
Current Relevance:
The keynesian aggregate expenditures model remains
relevant today because many prices in modern economy
are inflexible downward over relatively short periods of time.
A Stuck price model:
The simplifying assumptions underpinning the
aggregate expenditures model reflect the
economic conditions that prevailed during
the great depression.
A preview:
We will build up the aggregate expenditures model
in stages
CONSUMPTION AND INVESTMENT SCHEDULES
In the private closed economy, the two components
of aggregate expenditures are consumption, C, and
gross investment, Ig, Because we examined the
consumption schedule.
EQUILIBRIUM GDP: C + Ig = GDP
Tabular Analysis
Aggregate Expenditures
Equilibrium GDP
Real Domestic output
Disequilibrium
Graphical analysis
OTHER FEATURES OF EQUILIBRIUM GDP
-Saving and planned investment are equal (S=Ig)
-There are no unplanned changes in inventories,
Saving equals planned investment:
saving is a leakage, or a withdrawal, of
spending from the economy's circular flow
of income and expenditures.
saving causes consumption to be less than
total output or GDP.
No Unplanned Changes in inventories:
Unplanned changes in inventories play a
major role in achieving equilibrium GDP.
CHANGES IN EQUILIBRIUM GDP AND THE MULTIPLIER
Multiplier = Change in real GDP/Initial change in spending
Multiplier = 1/MPS
ADDING INTERNATIONAL TRADE
Net Exports and Equilibrium GDP:
The aggregate expenditure schedule labelled
C + Ig reflects the private closed economy.
It shows the combined consumption
and gross investment expenditures
occurring at each level of GDP
International economic Linkages:
Our analysis of net exports and real GDP
suggests how circumstances or policies
abroad can effect U.S GDP
Exchange rates
A caution on tariffs and devaluation
Prosperity abroad
The Net export schedule:
A net export schedule lists the amount
of net exports that occurs at each level of GDP
ADDING THE PUBLIC SECTOR
Government purchases and equilibrium GDP:
Suppose the government decides to purchase
20 billion dollars of goods and services regardless
of the level of GADP and tax collections
Taxation and Equilibrium GDP:
The government not only spends but also collects taxes.
Suppose it imposes a lump-sum tax, which is a tax of
a constant amount or, more precisely, a tax yielding the same amount of tax revenue at each level of GDP.
EQUILIBRIUM VERSUS FULL-EMPLOYMENT GDP
Inflationary expenditures GDP:
Economists use the term inflationary
expenditure gap to describe the amount by
which an economy's aggregate expenditures at
the full employment level of GDP exceed those
just necessary to achieve the fill-employment level of GDP
Application: The recession of 2007-2009
Recessionary expenditures GAP:
Keynes solution to a recessionary expenditures GDP
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