ECON CH 29

Saving is a:

leakage or withdrawal of spending from the economy's circular flow of income and expenditures - saving is what causes consumption to be less than total output or GDP

The most fundamental assumption behind the aggregate expenditures model is that:

prices in the economy are fixed

2 other features of equilibrium GDP in private closed economy:

1. saving and planned investment are equal (S=I) 2. There are no unplanned changes in inventories!!!

priv closed economy, aggregate expenditures =

C + I

priv open economy, aggregate expenditures =

C + I + (X-M) - add exports minus imports

If an increase in aggregate expenditures results in no increase in real GDP, we can surmise that the:

economy is already operating at full employment

In the private closed economy, the equilibrium GDP is where:

Consumption + Investment = GDP

Multiplier =

change in real GDP / initial change in spending - OR 1 / MPS - OR 1 / 1 - MPC

Investment is an:

injection of spending into the income-expenditures stream. - as an adjunct to consumption, investment is thus a potential replacement for the leakage of saving

If the injection of investment exceeds the leakage of saving,

then C + I will be greater than GDP and drive GDP upward. Below equilibrium GDP and will drive GDP higher.

If the leakage of saving at a certain level of GDP exceeds the injection of investment,

then C + I will be less than GDP and that level of GDP cannot be sustained. Any GDP for which saving exceeds investment is an above equilibrium GDP. This reduces real GDP