Chapter 9 - Chapter 9 The Aggregate Expenditures Model...

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Chapter 9- The Aggregate Expenditures Model Assumptions: -Private, closed economy. No government or international transactions. -Less than full employment; therefore, an increase in aggregate expenditures will increase real output and employment but not raise the price level -GDP = C + Ig = NI = PI = DI Investment Schedule- Shows the amount of planned investment at each level of output and income. Assume that Ig is independent of the level of current real GDP or DI. Equilibrium GDP- the level of output whose production will create total spending just sufficient to purchase the output. GDP = C + Ig Products Produced = Total Spending Disequilibrium occurs when: Total Spending does not equal Value of Products Produced 1. Output is less than spending: causes a reduction in inventories or “disinvestments”. The response is for businesses to increase production and increase employment until equilibrium is achieved. 2. Output is greater than Spending: causes an increase in inventories or “unplanned investment”. The response is for businesses to reduce production and employment until equilibrium is achieved .
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