1. Aggregate Expenditure
Chapter 14

2. AE (Aggregate Expenditure)
Concept
total expenditure in the economy which is equal to the sum of C, I, G and NX.
Autonomous vs. induced expenditure
Autonomous: spending not influenced by the level of real GDP (e.g., I, G, X)
Induced: spending affected by the level of real GDP (e.g., C)
Planned vs. unplanned
Actual expenditure = planned plus unplanned expenditure = real GDP

3. AE (Aggregate Expenditure) Continued
Distinction between AE and AD
AE : relationship between planned aggregate expenditure and real GDP
AD: relationship between real GDP demanded and the price level

4. Consumption Expenditure
Induced expenditure
Consumption function: relationship between consumption expenditure and disposable income (consumption depends on disposable income)
MPC (marginal propensity to consume): the fraction of the change in disposable income that is spent on consumption
MPC = Δ C / Δ Disposable Income
MPC for the US economy is .87
Other variables that affect (shift) consumption
Real interest rate, purchasing power of money, expected future disposable income

5. Other Expenditures Imports Exports Investment Government purchase
Induced expenditure (imports depend on the level of real GDP)
Marginal propensity to import = Δ imports / Δ real GDP
Exports
Autonomous expenditure
Investment
Government purchase

6. Equilibrium Expenditure
The level of aggregate expenditure that occurs when planned aggregate expenditure equals real GDP
If AE > real GDP  Unplanned decrease in inventories  production increase  back to equilibrium level
If AE < real GDP  Unplanned increase in inventories production decrease  back to equilibrium level

7. Expenditure Multiplier
You thought it is over with the multiplier with the 2nd test, but not yet.
What is it?
The magnitude by which real GDP (= equilibrium expenditure) changes from a change in autonomous expenditure
Δ real GDP / Δ autonomous expenditure
Formula
Expenditure multiplier = 1/ (1-MPC)

8. Expenditure Multiplier Continued
How to obtain the formula
Assuming no government and no foreign sector, Δ Y = Δ C + Δ I
Δ C can be expressed as MPC * Δ Y.
So, Δ Y = MPC * Δ Y + Δ I
By rearranging, Δ Y – MPC * Δ Y = Δ I or (1-MPC) Δ Y = Δ I
Therefore, Δ Y / Δ I = 1 / (1-MPC)
Actual multiplier is smaller than theoretically predicted because of imports and income taxes.