Chapter 31: The Aggregate Expenditures Model
Also known as the "Keynesian cross" model.
This model was created in the middle of the Great Depression, hoping to explain both why the Great Depression had happened and how it might be ended.
Assumptions & Simplifications
Equilibrium GDP
A "Stuck Price" model
Unplanned inventory adjustments
Current relevance
Consumption and investment schedules
Investment
Planned investment
Investment schedule
Investment demand curve
C+Ig=GDP
Aggregate expenditures model
Disequilibrium
Equilibrium GDP
Real domestic output
Changes in equilibrium GDP and the multiplier
No unplanned changes in inventory
Savings equals planned investment
Savings is a leakage
Investment is an injection
Formula: Multiplier= change in real GDP/initial change in spending
Equilibrium GDP changes in response to changes in either the consumption schedule or the investment schedule.
Formula: Multiplier= 1 / MPS
Occurs where the total quantity of goods produced equals the total quantity of goods purchased.