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Chapter 31: The aggregate expenditure model- Closed Economy - Coggle…
Chapter 31: The aggregate expenditure model- Closed Economy
Consumption & Investment
Investment schedule
Show the amount of investment forthcoming at each level of GDP
Horizontal line at Ig amount
Planned investment amount that business invest each possible point of GDP
Investment demand curve
Shows how much investment firms plan to make at each interest rate
The amount of investment at the interest rate is the same as Ig in Investment schedule
Assumption & Simplifications
Prices are fixed-"Stuck price model"
GDP=DI
Use the Keynsian aggregate expenditure model
Begin with private and closed economy
Exclude international trade& government
Investment spending
Consumption spending
Unplanned Inventory Adjustments
If inventory levels are rising- Cut back on production
If inventory levels are falling- Increase production
Firms intentionally decrease inventory if they think in future decline. Does not always go as planned & Inventories either rise or fall more than intended
Assumption
The presence of excess production capacity and unemployed labor implies that an increase in aggregate expenditure will increase real output and employment without raising the price level
Equilibrium GDP: C+Ig=GDP
When total quantity of goods produced (GDP)= Total quantity of goods purchased (C+Ig)
Real domestic output
Possible levels of total output of real GDP that they might produce
They will produce if revenue from selling amount equals or exceeds cost of producing it
If real domestic output is below equilibrium they will expand production
If real domestic output is above equilibrium they will Cut Back on production
Graphically
Equilibrium point: When 45 degree line crosses C+Ig line
at all points on 45 degree line equilibrium is possible
Savings
Savings= Ig+ Unplanned change in inventories
Savings larger than Injection- then C+Ig is lower than GDP - level can not be sustained
Investment
Amount they planned to invest
Spending exceeds GDP
expand production
Greater output, increase employment & total income
Aggregate expenditure
Shows the amount that will be spend at each possible output level
Below the equilibrium the aggregate expenditure is more than the GDP
Above the equilibrium the aggregate expenditure is less than GDP
Unplanned change in inventories
Equilibrium at Zero
Above equilibrium is positive
Below equilibrium is negative
Equilibrium can be sustained, business do not need to alter production
Change in Equilibrium GDP & the Multiplier
a initial change in spending can cause a greater change in real output through the multiplier effect
Multiplier= Change in real GDP divided by Initial change in spending
Multiplier= 1 divided by MPS
Graphically
Increase in investment- shift upward
Decrease in investment-Shift dawnward
X-Asis: Real domestic product Y-Asis: Aggregate expenditure
Other features of GDP
Savings equals planned investment (S=Ig)
Saving is a leakage of spending
causes consumption to be less than total output of GDP
Investment is an injection of spending
potential replacement for leakage
No unplanned changes in inventories
Firms do not change production