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Unit 5 The Aggregate Expenditures Model, 3 (Higher or lower than…

- - - - Consumption - Consumption plan relates to households
      - Gross Investment - relates to PLANNED INVESTMENT of business firms
        
        In order to determine PLANNED INVESTMENT, a Investment Schedule, showing collective amounts that businessess intend to invest, is drawn up
    - - Equilibrium
        
        Total quantity of goods produced (GDP) = Total quantity of goods purchased (C+Ig)
        
        ONLY EQUILIBRIUM GDP CAN EVER BE SUSTAINED
        
        Features:
        
        Saving (S) = Planned Investment (Ig)
        
        No unplanned changes in inventories
        
        SAVING
        
        Leakage/withdrawal of spending from economy's circular flow of income and expenditures
        
        INVESTMENT
      - Disequilibrium
        
        GDP>EQUILIBRIUM
        
        output fails to generate spending
        
        businesses cut back on production
        
        smaller output decreases employment and total income
        
        GDP<EQUILIBRIUM
        
        output insufficient for spending needs
        (buyers clearing goods faster than what producers can produce)
        
        businessess increase production
        
        greater output increases employment and total income
      - Changes in Equilibrium
        
        Equilibrium GDP changes in response to changes in either Consumption Schedule (C) or the Investment Schedule (Ig) (upward or downward shift of either 2 components