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The Aggregate Expenditures Model - Coggle Diagram
The Aggregate Expenditures Model
Assumptions and Simplifications
Stuck price model:
economic conditions with advantage to the Great Depression, prices are fixed, Keynes assumption because prices had not declined during the great depression
Unplanned Inventory adjustments:
increase in inventory levels because of Keynes great depression, inventories rise or fall depending on demand, unable or unwilling to slash prices, production decisions are made in response to unexpected changes in inventory levels.
Current Relevance:
prices are inflexible downward over short periods of time, how AEM adjusts to economic shocks over short periods, larger declines in GDP.
A preview- Stages:
AEM and GDP in a private closed economy, open closed economy to exports and imports, convert "private" to "mixed", GDP=DI
Consumption and Investments Schedule
Aggregate Expenditure= C + Ig, consumption level directly related to level of income and equal to profit, Investment is independent of income.
Investment Spending:
Investment demand curve (interest rates and spending), Investment schedule (investment and real GDP)
Equilibrium GDP: C+Ig=GDP
Real Domestic Output:
private sector might produce, revenue of output exceeds cost of producing,
Aggregate Expenditures:
sum of consumption and investment, shows amount spent at each output or income level, planned investment.
Equilibrium GDP:
total quantity of goods produced(GDP) = total quantity of goods purchased(C+Ig),
Disequilibrium:
GDP less than equilibrium, spending always exceeds GDP, adjust to imbalance by stepping up production, greater output will increase employment and total income, unable to recover costs then businesses will cut production.
Other features of Equilibrium GDP:
Saving equals planned investments
Saving is a leakage of spending
Investment is an injection of spending
No unplanned changes in inventories
Firms do not change production
