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Unit 5- Aggregate Expenditures Model - Coggle Diagram
Unit 5- Aggregate Expenditures Model
Assumptions and Simplifications
Stuck price model
Keynes (great depression)-assumption that prices are fixed
Unplanned Inventory Adjustments
unexpected rise or fall in demand.eg covid 19
Changes in household income-great depression
Current relevance
Keynesian aggregate expenditures model remains as many prices are inflexible downward over short periods. It helps to understand economic shocks
COVID 19
Consumption & Investment Schedules
Planned investment- how much forms intend to invest at each level of GDP
see investment curve pg 393
Equilibrium GDP
Real domestic output-possible levels of total output of real GDP that the private sector may produce.
Aggregate Expenditure- consumption plus investment- C+Ig
Equilibrium GDP- output whose production creates total spending that is sufficient to purchase that output. (C+Ig)=GDP
Disequilibrium-no level of GDP can be sustained. Spending exceeds GDP
Savings equal planned investment. S=Ig
Saving leakage- withdrawal of spending from economic flow.Causes less consumption.
Investments is an injection of spending into the economic flow of income and expenditure
Unplanned changes can occur and play a significant role in GDP and may affect equilibrium.
Multiplier =Change in real GDP/ Initial change in spending
Multiplier = 1/ MPS
international trade
creates jobs and additional income
C+Ig +(X-M) or (Xn) net exports
Positive net export- increases GDP
Negative net export-overstates expenditures and GDP falls
Prosperity abroad-international trade increases exports
Exchange rates- Appreciation or depreciation relative to other currencies.
Tariffs and devaluation- as a means of control during recessions to discourage reducing GDP
Public sector- government purchases are independent of GDP
Taxation- lump-sum tax is a constant tax amount at each GDP level.
Injection, leakages (tax) & unplanned changes
Sa+M+T = Ig+X+G
Equilibrium vs Full-employment GDP
Recessionary Expenditure Gap- amount by which aggregate expenditures at full employment level of GDP fall short of the amount required to achieve full-employment level
Keyness solution-increase government spending or lower taxes
Inflationary Expenditure Gap- amount by which an economies aggregate expenditure at full-employment level exceed those just necessary to achieve it.