The Aggregate Expenditure Model

Shows the amount of investment at each GDP level

Developed by John Maynard Keynes, a British economist, based on observations of the Great Depression.

Premise: The amount of goods and services produced and the level of employment depend directly on the level of aggregate expenditure.

Businesses will produce only a level of output that they think can profitably sell.

Businesses will idle their workers and machinery when there are no markets for their goods and services.

Assumptions and Simplifications

Fixed Price

Production decisions are made in response to unexpected changes in inventory levels

If GDP < Aggregate Expenditure: unplanned inventories are falling, firms increase production

Consumption Spending

Investment Spending

Investment Demand Curve

Investment Schedule

Determines the amount of investment spending

Shows the amount of investment at each GDP level

Private, closed economy = no government or foreign trade intervention

If GDP > Aggregate Expenditure: unplanned inventories are rising, firms decrease production

Consumption is directly related to Income level

Investment is independent of Income

If GDP = Aggregate Expenditure: no unplanned inventories, creates equilibrium GDP

Saving = leakage of spending (Consumption < GDP)

Investment = injection of spending