Please enable JavaScript.
Coggle requires JavaScript to display documents.
Unit 5: The Aggregate Expenditures Model (Closed Economy), Learning…
Unit 5: The Aggregate Expenditures Model (Closed Economy)
Assumptions and Simplifications
A "Stuck Model"
The economic conditions that were entailed during the Great Depression. NB
*
All prices are fixed. Keynes noticed that there was no great price decrease in order to promote sales.
Unplanned Inventory Adjustments
Unemployment was caused because of firms reacting in a predictable way to unplanned increases in inventory levels.
Also note: In order to achieve equilibrium; production decisions are made in response to unexpected changes in inventory levels.
Current Relevance
This economic model helps us to understand potential changes in the economy today. It allows individuals to understand what happens if there is a recession and why the government makes specific choices regarding Tax cuts or lowering interest rates.
This model is for a Private Closed Economy. This means it lacks both international trade and government.
Consumption and Investment Schedules
There are to aggregators in a private closed economy: 1. Expenditures are consumption (C) and 2. Gross Investment (Ig)
Every household needs to have an investment schedule to show their planned investment at every possible level of GDP.
Other features of 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
Learning.mheducation.com. 2022. SmartBook 2.0. [online] Available at:
https://learning.mheducation.com/static/awd/index.html?_t=1663657382480#/
[Accessed 20 September 2022].