Keynesian or aggregate expenditure (AE) model:

Keynesian macroequilibrium:
Actual output (income) = the planned output given by the AE model (i.e demand or expenditure in next period)

Real GDP = C + I + G + NX

Planned consumption (C)

• Determined by disposable income, less than one to one basis

Planned investment (I) and Government Spending (G)

• Fixed constant, unrelated to income

Planed net exports (NX)

• Decreases as income increase

If the actual expenditure is lower, inventories will build up. If higher, inventories will be depleted.

SRAS is horizontal out to the full employment where it becomes vertical.
If below full employment, increase expenditures =>increase output, change in AE = change in output
If at full employment, increase expenditure=> increase prices