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THE AGGREGATE EXPENDITURES MODEL - Coggle Diagram
THE AGGREGATE EXPENDITURES MODEL
Keynes created the aggregate expenditures module in the middle of the great depression , Hoping to explain why it happened and how it might be ended
The model states that the amount of goods and services produced in an economy and the employment depends directly on total spending
Assumptions and simplifications
A " STUCK PRICE" MODEL
Prices are fixed
Prices had not declined sufficiently during the great depression to boost spending and maintain output and employment at their pre-depression levels
Insufficient demand for their output
UNPLANNED INVENTORY ADJUSTMENTS
Massive unemployment of labour and capital was caused by firms reacting in a predictable way to unplanned increase in inventory levels
Aggregate expenditure model
CURRENT RELEVANCE
How modern economy is likely to adjust to various economic shocks over shorter time periods
A PREVIEW
Equilibrium GDP in a private closed economy to exports and imports
Convert private actors to mixed economy that includes the government sector
GDP equals disposable income
Consumption and investment schedule
Consumption schedule- a table of numbers showing the amounts households plan to spend.
Planned investment- The amount the firms plan or intend to invest
Consumption (C)
Gross investment (Ig)
Equilibrium GDP
C+ Ig= GDP
Real domestic output
- various levels of total output- of real GDP- that the private sector might produce
Aggregate expenditures
- shows the amounts that firms plan or intent to invest
Equilibrium GDP
- The equilibrium output is the output whose production creates total spending just sufficient to purchase that output
Disequilibrium
-No level other than the equilibrium level of GDP can be sustained.
Graphically
- At any point on the line, the value of what is measured on the horizontal axis GDP equals the value of what is measured on the vertical axis C+ Ig
Other features of equilibrium GDP
Savings equals planned investment (s =Ig
)
Leakage is a saving
Injection- An addition of spending into the income expenditure stream
No Unplanned changes in inventories
As part of their investment plan, firms may decide to increase or decrease their inventories .
Changes in equilibrium GDP and the multiplier
An initial change in spending can cause greater change in real output through the multiplier effect
Multiplier= change in real GDP/ Initial change in spending
Multiplier = 1 / ms
The multiplier depends on the size of the multiplier depends on size of the MPS in the economy