Question

1a. Draw a graph showing the relationship between aggregate expenditure and GDP. Use your graph to...

1a. Draw a graph showing the relationship between aggregate expenditure and GDP. Use your graph to show equilibrium GDP.

b. Show a point on your aggregate expenditure line where inventory investment is negative.

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Answer #1

The aggregate expenditure model talks about the relationship between GDP and aggregate expenditure. The model is based on the proposition that aggregate expenditure determines GDP. The equilibrium occurs when the aggregate expenditure is equal to the GDP. Point E is the equilibrium point and GDP* is the equilibrium GDP.

b. At the point of equilibrium inventory investment is zero. When spending is larger than GDP, unplanned inventory investment is negative. In this graph, it is shown at a point left to the equilibrium GDP.

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