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AGGREGATE EXPENDITURE: (economics 23e by Campbell R. McConnell, Stanley L.…

- - - - STAGES OF AGGREGATE EXPENDITURE MODEL
        
        Aggregate expenditure and equilibrium GDP are examined in a private closed economy (households and businesses)
        
        Private open economy includes international trade
        
        Mixed economy includes government
        
        COMPONENTS OF AGGREGATE EXPENDITURE: consumption (C), investment (Ig) - collective planned investment of firms that they are willing to invest at each level of GDP
        
        INVESTMENT SCHEDULE VS INVESTMENT DEMAND CURVE: schedule displays the level of investment incoming at each level of GDP; curve displays what firms plan to make at each interest rate
        
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- - - - DISEQUILIBRIUM: only level of GDP that can be sustained is equilibrium GDP
        
        GDP LESS THAN EQUILIBRIUM: spending is greater than GDP. Firms will increase production, and employment will increase along with total income
        
        GDP GREATER THAN EQUILIBRIUM: spending fails to clear shelves of goods. Firms will decrease production resulting in fewer jobs and less income
        
        GRAPH ANALYSIS: equilibrium GDP occurs when aggregate expenditure schedule intersects 45-degree line. GDP above equilibrium occurs when C+Ig lies below 45-degree line (decrease in production). GDP below equilibrium occurs when C+Ig lies above 45-degree line (increase in production)
- - - - Investments are an injection of spending into the income-expenditure stream and replaces the leakage of saving
        
        NO UPLANNED CHANGES IN INVENTORIES
        
        Firms may increase or decrease their inventories as part of their investment plans helping to achieve equilibrium GDP at which point unplanned changes in inventories are zero
        
        Investment and savings are always equal at all levels of GDP when unplanned inventories are taken into account as these equate savinngs with investment when added to planned investment (to become actual investment)
        
        MULTIPLIER EFFECT: change in spending causes greater change in real GDP
        
        MULTIPLIER=CHANGE IN REAL GDP/INITIAL CHANGE IN SPENDING
        
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