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Chapter 31: The Aggregate Expenditures Model - Coggle Diagram
Chapter 31: The Aggregate Expenditures Model
"Stuck Price"mode
Causes inventories to pile up
Decreases rate of production
Firms are unable/unwilling to cut prices
Result in less workers employed
Production decisions are made in response to unexpected changes in inventory levels
History
Created by Keynes
In the middle of the Great Depression
GDP fell by 27% between 1929-1933
Unemployment rose to 25%
Economy sunk below potential output
Examined in closed economy
Lacks international trade
No government
Includes businesses and households
Two components
Consumption, C
Gross Investment ,Ig
Assume GDP=DI (disposable income)
Planned investment: The amount business firms collectively intend to invest at each possible level of GDP
Develop investment schedule
Assume independent of the level of current disposable income or real output
Equilibrium
C + Ig = GDP
Goods produced = Goods purchased
Equilibrium GDP
Savings = Planned investments
No unplanned changes in inventories
Actual investment = Planned investment + unplanned changes in inventories
Savings is a leakage of spending
Lead to consumption being less than total output GDP
Investment is an injection of spending into the income-expenditure stream
Purchases of capital goods
(C+Ig) less than GDP is not sustainable : Leakage of saving exceeds investment
Savings more than Ig is an above equilibrium GDP (reverse also true)
Initial changes in spending causes a greater change in real output through the multiplier efffect
Multiplier
Multiplier = change in real GDP / Initial change in spending
Size depends on the size of the MPS in the economy
Multiplier = 1/MPS