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