# 3. A graphical approach to equilibrium GDP In a private closedeconomy The following graph shows the consumption function (C) for a hypothetical private closed economy and a 45-degree line along

3. A graphical approach to equilibrium GDP In a private closedeconomy
The following graph shows the consumption function (C) for a hypothetical private closed economy and a 45-degree line along which aggregate
expenditure equals real GDP (AE=Y), Recall that a private closed economy does not have government and does not trade with the rest of the world (so
G-D and (X-M)=0). In a private closed economy, real GDP is equal to disposable income.
At the current real interest rate, the level of investment in this economy is equal to \$75 billion at each level of real GDP. Use the blue line (circle
symbols) to plot this economy’s initial aggregate expenditure line, (C + 1). Then, use the black point (X symbol) to indicate this economy’s initial
equilibrium output. Dashed drop lines will automatically extend to both axes. ( nt: You can see two of the coordinates along the consumption
function by mousing over the green triangles on the graph.)
750
AF BY
Aggregate Expand hen
Expenditures
450 At the current real interest rate, the level of investment in this economy is equal to \$75 billion at each level of real GDP. Use the blue line (circle
symbols) to plot this economy’s initial aggregate expenditure line, (C + 1). Then, use the black point (X symbol) to indicate this economy’s initial
equilibrium output. Dashed drop lines will automatically extend to both axes. (nt: You can see two of the coordinates along the consumption
function by mousing over the green triangles on the graph.)
O-
AE -Y
Aggregate Expenditure
C
Aggregate Expenditures
109 : 390 309
HOM OOP At the level of equilibrium output you just indicated, the level of saving is equal to
At an output level of \$700 billion, aggregate expenditure will be
real GDP and firms will experience
in business inventories. Firms will respond to this situation by:
Increasing production
Leaving production unchanged
Decreasing production
At an output level of \$650 billion, aggregate expenditure will be
real GDP and firms will experience
In business Inventories. Firms will respond to this situation by ;
Decreasing production
Leaving production unchanged
Increasing production
Suppose the real interest rate rises and the level of investment in this economy decreases by \$25 billion. Use the blue line (circle symbols) to show
the economy’s aggregate expenditure line, (C + 1), after the decrease in investment. Then use the gray point (star symbol) to show the economy’s
new equilibrium output. Dashed drop lines will extend to both axes.
nt: Start with your aggregate expenditure line from the previous graph, Make sure the slope of the aggregate expenditure line is the same as the
previous aggregate expenditure line you just plotted, You can check the slope of the line by clicking on the line after you plot it. nt: Start with your aggregate expenditure line from the previous graph, Make sure the slope of the aggregate expenditure line is the same as the
previous aggregate expenditure line you just plotted. You can check the slope of the line by clicking on the line after you plot it.
700
Aggregate Expenditure with higher real Interest rule
650
Equilibrium with higher real interest rate
200
180
100
300
TOO. BOO
Real GOP
The simple spending multiplier for this private closed economy is

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