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