11.2 Consumption and Investment Schedules

What are the two components of aggregate expenditures in a private closed economy?

Consumption (C) and Gross Investment (𝐼𝑔)

What does the investment demand curve (ID) show?

The amount firms plan to invest at different real interest rates

What does the investment schedule (𝐼𝑔) show?

The amount of planned investment at each level of GDP, assuming investment is independent of GDP.

How is the investment schedule derived?

By combining the real interest rate (e.g., 8%) with the investment demand curve to find a fixed investment amount (e.g., $20 billion), then applying that amount across all GDP levels.

Why is investment shown as $20 billion at all GDP levels in Table 11.1?

Because at the fixed interest rate of 8%, firms plan to invest $20 billion regardless of GDP—investment is autonomous.

What’s the key difference between the investment demand curve and the investment schedule?

• ID curve: Investment vs. interest rate

• 𝐼𝑔 schedule: Investment vs. GDP

What assumption underlies the investment schedule in the AE model?

Planned investment is independent of disposable income or real output.

How do firms adjust production in the AE model?

• If spending is low → inventories rise → firms cut production

• If spending is high → inventories fall → firms increase production

What does the AE model assume about prices?

Prices are stuck (fixed), so output depends directly on total spending.

Why is the AE model useful for short-run analysis?

It explains how output adjusts to changes in spending when prices are inflexible.

The investment demand _____ and the real interest rate together determine the amount of investment spending….

Curve

Investment _____ shows the amount of investment forthcoming at each level of GDP.

Schedule

Which of the following statements are true of investment schedule and investment demand curve?

• The investment schedule is the amount of investment forthcoming at each level of GDP.

  correct

• The investment demand curve is based upon and determined by the real rate of interest.