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The Aggregate Expenditures Model - Coggle Diagram
The Aggregate Expenditures Model
A “Stuck Price” Model
Prices are fixed
Unplanned Inventory Adjustments
The model’s other key assumption—the one that allows it to achieve equilibrium—is that production decisions are made in response to unexpected changes in inventory levels
If total spending is unexpectedly low in the economy, inventories will unexpectedly rise, causing firms to cut back on production. If total spending is unexpectedly high, inventories will unexpectedly fall, causing firms to increase production.
Consumption and Investment Schedules
The two components of aggregate expenditures are consumption, C, and gross investment, Ig
Planned investment
The amount that firms plan or intend to invest.
Investment schedule
A curve or schedule that shows the amounts that firms plan to invest at various possible values of real gross domestic product (real GDP).
The investment schedule Ig shows the amount of investment forthcoming at each level of GDP; Ig is different from the investment demand curve, ID, which shows how much investment firms plan to make at each interest rate.
Equilibrium GDP: C + Ig = GDP
Aggregate expenditures schedule
A table of numbers showing the total amount spent on final goods and final services at different levels of real gross domestic product (real GDP).
Equilibrium GDP
The gross domestic product at which the total quantity of final goods and final services purchased (aggregate expenditures) is equal to the total quantity of final goods services produced (the real domestic output); the real domestic output at which the aggregate demand curve intersects the aggregate supply curve.
Disequilibrium
No level of GDP other than the equilibrium level of GDP can be sustained. At levels of GDP less than equilibrium, spending always exceeds GDP
The reverse is true at all levels of GDP greater than the equilibrium level. Businesses will find that these total outputs fail to generate the spending needed to clear the shelves of goods.
Other Features of Equilibrium GDP
Saving and planned investment are equal (S = Ig).
There are no unplanned changes in inventories.
Saving Equals Planned Investment
Savings
Leakage
(1) A withdrawal of potential spending from the income-expenditures stream via saving, tax payments, or imports; (2) a withdrawal that reduces the lending potential of the banking system.
Investment
Injection
An addition of spending into the income-expenditure stream: any increment to consumption, investment, government purchases, or net exports.
The aggregate expenditures model is a stuck-price model in which the amount of real output depends directly on the amount of total spending in the economy.