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The Aggregate Expenditures Model (Closed Economy) - Coggle Diagram
The Aggregate Expenditures Model (Closed Economy)
Assumptions and Simplifications
Simplifying assumptions reflect the economic conditions that prevailed during the Great Depression.
The most important assumption is that prices are fixed
The aggregate expenditures model is a stuck price
GDP = DI
Begin with private closed economy
Consumption spending
Investment spending
Use the Keynesian aggregate expenditures model
Consumption and Investment Schedule
Two components of aggregate expenditures model
Consumption (C)
Gross investment (Ig)
Planned investment: The amount that firms plan or intend to invest
Investment schedule: A curve or schedule that shows the amounts that firms plan to invest at various possible values of real GDP.
Equilibrium GDP
The equilibrium output is the output whose production creates total spending just sufficient to purchase that output.
The equilibrium GDP occurs where the total quantity of goods purchased equals the quantity of goods produced (C + Ig = GDP)
The gross domestic product at which the total quantity of goods and final services purchased is equal to the total quantity of final goods and services produced
Other features of equilibrium GDP
Saving and planned investment are equal (S = Ig)
There are no unplanned changes in inventories
Firms do not change production
Saving is a leakage of spending
Investment is an injection of spending
The Multiplier Effect
Multiplier = change in real GDP / initial change in spending
Multiplier = 1/MPS
An upward shift of the aggregate expenditures schedule will increase the equilibrium GDP.
A downward shift will lower the equilibrium GDP.