11.3 Equilibrium GDP: C + Ig = GDP

What is the formula for equilibrium GDP in a private closed economy?

C + I_g = GDP

Total planned spending = total output

What does the 45° line represent in the AE model graph?

Every point on the line shows where aggregate expenditures (C + I𝑔) = GDP — the condition for equilibrium.

How is the aggregate expenditures schedule (C + I𝑔) constructed?

By adding the constant investment schedule (I𝑔) to the upward-sloping consumption schedule (C).

Why is the vertical distance between C and C + I𝑔 constant?

Because planned investment (I𝑔) is assumed to be the same at every GDP level.

What determines the slope of the aggregate expenditures line?

The marginal propensity to consume (MPC), since investment is constant.

What is the slope of the AE line in this example?

MPC = 15/20 = 0.75

For every $20B increase in GDP, AE rises by $15B.

What happens when GDP < equilibrium (e.g., $410B)?

• AE > GDP → inventories fall

• Firms increase production → GDP rises toward equilibrium

What happens when GDP > equilibrium (e.g., $510B)?

• AE < GDP → inventories rise

• Firms cut production → GDP falls toward equilibrium

Why is $470B the equilibrium GDP in Table 11.2 and Figure 11.2?

Because at $470B, total spending (C + I𝑔) exactly equals total output — no inventory changes.

What does it mean if the AE line is above the 45° line?

Spending exceeds output → inventories fall → firms increase production.

What does it mean if the AE line is below the 45° line?

Spending is less than output → inventories rise → firms reduce production.

No level of GDP other than the _______ can be sustained.

Equilibrium level of GDP

The slope of the AE schedule depends on….

How much C changes when GDP changes

What is planned investment?

The amount that firms intend to invest.

When GDP is ________ than its equilibrium level, businesses will raise the rate of production, leading to more employment and consequently raising the levels of consumption and income.

Lower

When the current production level of goods and services leads to output levels below equilibrium GDP, it results in:

A reduction of goods in inventory and too low a production rate.

If GDP is above equilibrium, the aggregate expenditure schedule is located on the graph in a position….

Below the 45 degree line

It is undesirable for actual GDP to be less than the equilibrium level because there will be a(n)…..

Unplanned decline in business inventories