Planned aggregate expenditure

The consumption function relates the level of consumption in a period to the level of disposable personal income in that period, planned aggregate expenditure. In this section, we incorporate other components of aggregate demand: investment, government purchases, and net exports.

Aggregate expenditure is the current value of all the finished goods and services in the economy. In economics, aggregate expenditure is the current value of all the finished goods and services in the economy. It is the sum of all the expenditures undertaken in the economy by the factors during a specific time period. Written out the equation is: aggregate expenditure equals the sum of the household consumption C , investments I , government spending G , and net exports NX. The aggregate expenditure determines the total amount that firms and households plan to spend on goods and services at each level of income.

Planned aggregate expenditure

Keynesian Model of Aggregate Planned Expenditure. Main Concept. According to the Keynesian model of macroeconomics, aggregate planned expenditure PE is determined as the sum of planned consumption expenditures C , planned investment expenditures I , planned government expenditures G and planned net exports NX :. The degree to which consumption changes in response to a change in disposable income depends on the marginal propensity to consume MPC. Investment expenditure, government expenditure, and net exports are all set to be exogenous variables in this model, meaning that they do not vary with the current level of real GDP and so must be determined by external forces such as government policy and foreign exchange. In more advanced macroeconomics models, net exports is also be considered to be an endogenous variable and so changes the slope of the graph by adjusting the marginal propensity to spend. In the diagram below:. The intersection of these two lines is known as Keynesian equilibrium. The following graph shows a simple planned expenditure function. Use the sliders to adjust the components of PE and observe how the equilibrium changes in response. Components of Aggregate Planned Expenditure. Autonomous Component of Consumption CA.

Induced aggregate expenditures vary with real GDP, as in Panel b. Keynesian Model of Aggregate Planned Expenditure.

If you're seeing this message, it means we're having trouble loading external resources on our website. To log in and use all the features of Khan Academy, please enable JavaScript in your browser. Search for courses, skills, and videos. The Keynesian cross. Use a diagram to analyze the relationship between aggregate expenditure and economic output in the Keynesian model. Key points. The expenditure-output model, or Keynesian cross diagram, shows how the level of aggregate expenditure varies with the level of economic output.

The model starts with the expenditure categories defined and measured in national accounts and described in Chapter 4. Then we can write:. Expenditure as measured by national accounts is the sum of actual expenditures by business and households. GDP Y is the national accounts measure of the sum of actual expenditure in the economy. Aggregate expenditure AE is planned expenditure by business and households. The distinction between planned and actual expenditures is a key factor in explaining how the national income and employment are determined.

Planned aggregate expenditure

If you're seeing this message, it means we're having trouble loading external resources on our website. To log in and use all the features of Khan Academy, please enable JavaScript in your browser. Search for courses, skills, and videos. The Keynesian cross. Use a diagram to analyze the relationship between aggregate expenditure and economic output in the Keynesian model. Key points. The expenditure-output model, or Keynesian cross diagram, shows how the level of aggregate expenditure varies with the level of economic output. The equilibrium in the diagram occurs where the aggregate expenditure line crosses the degree line, which represents the set of points where aggregate expenditure in the economy is equal to output, or national income.

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Because this is given in real terms it means that we are not just spending more since prices are controlled , but rather buying more and more. The final ingredient of the Keynesian cross or expenditure-output diagram is the aggregate expenditure schedule, which shows the total expenditures in the economy for each level of real GDP. Physical capital per person refers to the amount and kind of machinery and equipment available to help people get work done. They are not. Aggregate expenditures and the multiplier effect. We assume that planned investment will determined ahead of time and will therefore not change based on current real GDP. Key Terms aggregate : A mass, assemblage, or sum of particulars; something consisting of elements but considered as a whole. Maybe I don't have to keep switching colors because we've seen this before. What do aggregate expenditures AE have to do with aggregate demand AD? Wealth can also encapsulate savings. If a household has a larger safety net, they may be more likely to spend more knowing that if things go south, they will be able to weather the storm. Net exports are another component of aggregate expenditures. This idea stems from the belief that wages, prices, and interest rage were all flexible. Aggregate expenditures equal the sum of consumption C and planned investment I P. To understand why the point of intersection between the aggregate expenditure function and the degree line is a macroeconomic equilibrium, consider what would happen if an economy found itself to the right of the equilibrium point E, say point H in Figure 9.

Just as a consumption function shows the relationship between real GDP or national income and consumption levels, the investment function shows the relationship b etween real GDP and investment levels. When businesses make decisions about whether to build a new factory or to place an order for new computer equipment, their decision is forward-looking, based on expected rates of return, and the interest rate at which they can borrow for the investment expenditure.

Key points. They're not saying that this term should be aggregate income times aggregate income minus taxes. A shift in supply or demand impacts the GDP. Graphing Equilibrium An economy is said to be at equilibrium when the aggregate expenditure is equal to the aggregate supply production in the economy. Direct link to Celso Mattheus C. An economy is said to be at equilibrium when the aggregate expenditure is equal to the aggregate supply production in the economy. The multiplier is influenced by an incremental amount of spending that leads to higher consumption spending, increased income, and then even more consumption. The multiplier is smaller, of course, because the slope of the aggregate expenditures curve is flatter. Recession : This graph shows the economic recession that occurred in the U. This model later became the aggregate expenditures model that we are talking about now. Skip to content 9. Crowding out can occur because the initial increase in spending can cause an increase in the interest rates or the price level. You have said that we can't just increase Y because inventory will build up but if Y is the GDP, increasing G is increasing Y and firms respond by increasing planned expenditure? This website uses cookies to improve your experience.