The Aggregate Expenditures Model

Assumptions and Simplifications

The prices are fixed.

GDP = DI

Uses the Keynesian aggregate expenditures model.

It begins with private closed economy.

Consumption spending.

Investment spending

Investment demand curve

Investment schedule

Shows the amount of investment forthcoming at each level of GDP.

Shows how much investment firms plan to make at each interest rate.

Equilibrium GDP

The output whose production creates total spending just sufficient to purchase that output.

It occurs where the total quantity of goods produced (GDP) equals the total quantity of goods purchased. (C+Ig)

C + Ig = GDP

Other features of equilibrium GDP

No unplanned changes in inventory levels.

Saving equals planned investment

Investment is an injection of spending.

Saving is a leakage of spending.

Firms do not change production.