True or False. The aggregate expenditures model assumes flexible prices.

The model of aggregate expenditures determines the national income of an economy through private consumption, gross investment, government purchases, and net exports.

Y = C + Ig+ G + NX

John Maynard Keynes proposed this model after the Great Depression of the 1930s. It was a major criticism of the classical model of income and output and considered the fall of economic activities during the economic depression of the 1930s.

Keynes noticed that during the depression of the 1930s, the price level did not reduce at all during the crisis. Therefore, the demand for the output produced fell significantly, and the supply exceeded the demand for output, causing inflation. Too much money was chasing too little of the output.

Therefore, Keynes proposed the aggregate expenditure model at fixed prices to determine the equilibrium level of output, income, and employment.