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The Aggregate expenditures model(Closed Economy), Screenshot 2025-06-07…
The Aggregate expenditures model(Closed Economy)
Assumptions and Simplifications
The most important assumption is that prices are fixed meaning that prices can not change
Another assumption is one relating to inventory adjustments that allows it to achieve equilibrium
The assumption is that production decisions are made in response to unexpected changes in inventory levels
Inventories unexpectedly falling ~ Firms will increase production ~ to take advantage of a unexpectedly good environment
Inventories unexpectedly rise ~ Firms will cut down on production ~ this will balance production with sales to prevent inventory levels from exceeding warehouse capacity
We use the Keynesian aggregate expenditures model that was developed during the great depression
GDP = DI
It begins with the private closed economy
Consumption spending
Investment spending
Consumption and investment schedules
Investment schedule
Investment demand curve
Difference between Ig and ID
Investment Schedule(Ig)
Shows the amount of investment forthcoming at each level of GDP.
Investment demand curve(ID)
Shows how much investment firms plan to make at each interest rate.
Other Feautures of Equilibrium GDP
Savings = Planned investments
Savings is a leakage of spending
Investment is an injection of spending
Actual investment consist of planned investment plus unplanned changes in inventories and is always = to saving in a private closed economy
There are no unplanned changes in inventories~ Firms o not change production
Equilibrium GDP
(C + Ig = GDP)
Aggregate expenditures
Consists of Consumption(C) plus investment(Ig)~(C+Ig)
Real domestic output
Firms are willing to produce just as long as the revenue that they receive from selling any particular amount of output is equal to or exceeds the costs of producing it.(GDP)
Multiplier effect
Multiplier = Change in real GDP/Initial change in spending
Through the multiplier effect ~ initial change in investment spending can cause a magnified change in domestic output and income
