The Simplest Short-Run Macro Model

Another review of the circular flow model!

Measuring GDP

GDP measured in expenditure is made up of:

• Consumption
• Investment
• Government purchases
• Net exports

Autonomous expenditure does not change when income changes

Induced expenditure changes when income changes

$$ AE = C + I + G + (X - IM) $$

Desired aggregate expenditure (AE) is the sum of desired expenditures on domestically produced output

We are also making the following assumptions (important simplifications):

• There is no international trade
• There is no government ⇒ no taxes
• The price level is constant

The Consumption / Savings Function