The aggregate expenditure model

Assumptions and simplifications

begin with private, closed economy

uses the Keynesian aggregate expenditure model

Equilibrium GDP

Savings 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

Consumption spending

Investment spending

interaction between production and inventory

if inventories unexpectedly rise, firms will cut production

If inventories unexpectedly fall, firms will boost production

prices are fixed

formulated on the observation that prices did not decline enough to boost spending and maintain output

Aggregate expenditure model: explains how the modern economy is likely to adjust to various economic shocks over shorter periods of time

Conditions present during the Great depression

The unemployment rate was at double digits

Real GDP was significantly below potential output

Consumption and investment

Planned investment

the amount that firms plan or intend to invest end

Investment schedule

A curve or schedule that shows the amounts that firms plan to invest at various possible values of real