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The Aggregate Expenditure Model - Coggle Diagram
The Aggregate Expenditure Model
Created by Keynes during the Great Depression
The unemployment rate was high
Real GDP was below potential output
Surplus of productive resources
Begin with private, closed economy
Consumption spending
Investment spending
Based upon real interest rate
Investment demand curve
Real interest rates
Investment schedule: shows the amount of investment forthcoming at each level of GDP
Planned investment
Assumptions
Prices are fixed
Production decisions are made in response to unexpected changes in inventory levels
Lack of labor and capital was caused by firms reacting in a predictable way to unplanned increases to inventory levels
Equilibrium GDP
The equilibrium output is the output whose production creates total spending just sufficient to purchase that output
Saving (leakage) equals planned investment (injection)
No unplanned changes in inventories.
GDP= C+Ig
Disequilibrium GDP
Spending always exceeds GDP at levels of GDP less than equilibrium
An unplanned decline in inventories
Businesses should step up production
More production= more employment and income
Illuminates the thinking underlying the government's stimulus programs during recessions.
Tax cuts
Government spending icreases
lowe interest rates