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