AGGREGATE EXPENDITURE MODEL

Investment Demand curve

Developed by John Maynard Keynes during the Great Depression. "Keynesian cros model"

Assumptions:

Prices are fixed

GDP = Disposable income

Start with a private, closed economy (no international trade, no government involvement)

Spending: Consumption spending and Investment spending

Investment spending is planned regardless of the current income situation

Investment Demand curve

Downward sloping

Indicates level of investment at different real interest rates

Investment schedule

Horizontal line

Shows investment at determined interest rate for current level of GDP

GDP = Domestic output.

Producers expect to sell all there output, therefore if Total spending (C +Ig) does not equal GDP, producers will increase or decrease their output levels.

If GDP > (C+Ig) - surplus inventory. Producers decrease output

If GDP < (C+Ig) - Shortage in inventory. Producers increase output.

if GDP = (C+Ig) - Equilibrium. No change.

Aggregate Expenditure Schedule

Consumption schedule + vertical addition of the Investment schedule

Equilibrium is where the 45 degree line (GDP) intersect the Aggregate Expenditure schedule (C + Ig)