Chapter 31: The Aggregate Expenditures Model

Vocabulary-style flashcards covering the Aggregate Expenditures Model, including equilibrium conditions, gaps, and Keynesian vs. Classical economic policies.

Aggregate Expenditures Model

A Keynesian model where the total sum of spending determines the level of GDP, characterized as a "stuck price" model because prices are assumed to be fixed.

Equilibrium GDP ($C + I_g = \text{GDP}$)

The point in a private closed economy where aggregate expenditures equal the total value of domestic output.

Saving ($S$)

Considered a leakage of spending from the circular flow of income and expenditure.

Planned Investment ($I_g$)

An injection of spending into the circular flow of income and expenditure.

Unplanned Inventory Decrease

Occurs when household saving is less than planned investment ($S < I_g$), forcing businesses to sell goods they did not intend to sell and leading to increased production and employment.

Unplanned Inventory Increase

Occurs when household saving is greater than planned investment ($S > I_g$), leading to an inventory buildup, cuts in production, and increased unemployment.

Investment Demand Curve ($ID$)

A curve showing the relationship between the expected rate of return ($r$), the real interest rate ($i$), and the billions of dollars of investment.

Equilibrium Condition: Unplanned Inventories

At the equilibrium GDP, unplanned changes in inventories are zero, meaning firms have no incentive to change production levels.

Multiplier Effect

The ratio of a change in equilibrium GDP to the initial change in spending, where the slope of the aggregate expenditures line equals the MPC.

Net Exports ($X_n$)

The component of aggregate expenditures in an open economy calculated as Exports ($X$) minus Imports ($M$).

Positive Net Exports ($X_n > 0$)

A situation where exports exceed imports, creating production, employment, and income within the domestic economy.

Negative Net Exports ($X_n < 0$)

A situation where imports exceed exports, which can reduce the level of aggregate expenditures.

Lump Sum Tax

A tax of a constant amount that is subject to the multiplier effect and affects equilibrium GDP by reducing disposable income ($DI$).

Recessionary Expenditure Gap

The amount by which aggregate spending at the full-employment GDP falls short of the level needed to achieve full employment; corrected by increasing government spending ($G$) or decreasing taxes ($T$).

Inflationary Expenditure Gap

The amount by which aggregate spending at the full-employment GDP exceeds the amount necessary to achieve full employment; corrected by decreasing government spending ($G$) or increasing taxes ($T$).

Say’s Law

A concept in Classical economics suggesting that the economy will automatically adjust and supply creates its own demand (laissez-faire).

Keynesian Economics

An economic theory stating that cyclical unemployment can occur because the economy will not correct itself, requiring the government to actively manage macroeconomic instability.