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THE AGGREGATE EXPENDITURES MODEL - Coggle Diagram
THE AGGREGATE EXPENDITURES MODEL
STUCK PRICE MODEL
Important assumption is that prices are fixed
It is a stuck price model because the price level cannot change at all
CONSUMPTION AND INVESTMENT SCHEDULES
Two components of the aggregate expenditures are consumption (C) and gross investment (Ig)
INVESTMENT SCHEDULE OR CURVE
Shows the amounts business firms collectively intend to invest their planned investment at each possible level of GDP
The aggregate expenditures model in which the amount of real output depends directly on the amount of total spending in the economy
Firms decide how much real output to produce in response to unexpected changes in inventory levels
EQUILIBRIUM GDP
In a private closed economy, equilibrium GDP occurs where aggregate expenditures equal real domestic output (C + Ig = GDP)
At equilibrium GDP, saving equals planned investment (S = Ig) and unplanned changes in inventories are zero
Saving is a leakage, or a withdrawal, of spending from the economy's circular flow of income and expenditures
Investment-that is, purchases of capital goods-is therefore an injection of spending into the income-expenditures stream
Through the multiplier effect, an initial change in investment spending can cause a magnified change in domestic output and income
Multiplier = change in real GDP / initial change in spending
The size of the multiplier depends on the size the MPS in the economy
Multiplier = 1 / MPS
ADDING INTERNATIONAL TRADE
Positive net exports increase aggregate expenditures relative to the closed economy and, other things equal, increase equilibrium GDP
Negative net exports decrease aggregate expenditures relative to the closed economy and, other things equal, reduce equilibrium GDP
In the open economy, changes in prosperity abroad, tariffs, and exchange rates can affect U.S. net exports
Tariffs and deliberate currency depreciations are unlikely to increase net exports because other nations will retaliate
In an open economy, the aggregate expenditures are C + Ig + (X - M)
OTHER FEATURES OF EQUILIBRIUM GDP
Government purchases shift the aggregate expenditures schedule upward and raise equilibrium GDP
Taxes reduce disposal income, lower consumption spending and saving, shift the aggregate expenditures schedule downward, and reduce equilibrium GDP
GLOSSARY
Leakage
A withdrawal of potential spending from the income-expenditures stream via saving, tax payments, or imports
Injection
An addition of spending into the income-expenditure stream: any increment to consumption, investment, government purchases, or net exports.
Planned investment
The amount that firms plan or intend to invest
A recessionary expenditures gap is the amount by which aggregate expenditures at the full-employment GDP fall short of those needed to achieve full employment
INTERGRATE THE PUBLIC SECTOR
Government purchases in the model of the mixed economy shift the aggregate expenditures schedule upward and raise GDP
Equilibrium GDP occurs where Ca + Ig +Xn + G =GDP
Leakages of after-tax saving (Sa) imports (M), and taxes (T) equal injections of investment (Ig), exports (X), and government purchases (G)
INTERGRATE THE INTERNATIONAL SECTOR
The net exports schedule in the model of the open economy relates net exports to equilibrium GDP
Positive net exports increase the aggregate expenditures to a higher level than they would be in a closed economy
Negative net exports decrease the aggregate expenditures than they would be in a closed economy, which decrease the equilibrium GDP