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AGGREGATE EXPENDITURE MODEL, Investment Demand curve, Investment schedule …
AGGREGATE EXPENDITURE MODEL
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
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)
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