The Aggregate Expenditures Model (Closed Economy)
Assumptions and Simplifications
"Stuck price" model
Unplanned inventory adjustments
Prices are fixed
Unexpected rise in inventory - Reduce production Unexpected fall in inventory - Increase production
Private closed economy
GDP = DI
Consumption & Investment schedules
Investment schedule
Investment demand curve
Planned investment
Two components - Consumption (C) & Gross Investment (Ig)
Vertical axis - Expected rate of return (r) and Real interest rate (i)
Horizontal axis - Investment
Vertical axis - Investment
Horizontal axis - Real domestic product (GDP)
Equilibrium GDP: C + Ig = GDP
Aggregate expenditures
Equilibrium GDP
Real domestic output
Disequilibrium
Aggregates expenditure schedule
Vertical axis - Aggregate expdenditure C + Ig
Horizontal axis - Real domestic product GDP
Other features of equilibrium GDP
No unplanned changes in inventories
Saving equals planned investment
Saving is a leakage of spending
Investment is an injection of spending
Firms do not change production
Changes in equilibrium and The multiplier
Multiplier = changes in real GDP / initial change in spending