4.10. Aggregate Expenditure (AE)

Question 1

Aggregate Expenditure

Answer 1

Total amount spent in the economy at different levels of national income (GDP) in a given time period

Question 2

Aggregate Expenditure Formula

Answer 2

AE = C + I + G + (X - M)

Question 3

Aggregate Expenditure Curve

Answer 3

• Aggregate demand is derived from aggregate expenditure
• AD curve plots total spending at different price levels
• AE curve plots total spending at different income levels

Question 4

Induced Expnditure

Answer 4

Spending that varies with income

- area above AE curve

Question 5

Autonomous Expenditure

Answer 5

Spending that does not vary with income

- area below AE curve

Question 6

Consumption meaning

Answer 6

spending by households on goods and services.

Question 7

Determinants of consumption

Answer 7

• Disposable income (key determinant, analysed in detail next)
• Interest rates
• Availability of credit
• Confidence
• Expectations
• Wealth

Question 8

Average Propensity to Consume (APC)

Answer 8

the proportion of disposable income that is consumed.

Question 9

APC =

Answer 9

C / Y

Question 10

Average Propensity to Save (APS)

Answer 10

the proportion of disposable income that is saved.

Question 11

APS =

Answer 11

S / Y

Question 12

Relationship between APC and APS

Answer 12

APC + APS = 1

Question 13

APC and APS at low incomes

Answer 13

• APC is very high and APS is very low.
• Most / all income tends to be spent.
• Dissaving (consumption > income) might occur (through borrowing or using previous savings).

Question 14

APC and APS as incomes rise

Answer 14

• APC starts to fall and APS starts to rise.
• Actual amount spent in total is higher but APC falls.
• Actual amount saved increases.
• Saving is a luxury.

Question 15

Marginal Propensity to Consume (MPC)

Answer 15

the proportion of extra disposable income that is consumed.

Question 16

MPC =

Answer 16

ΔC / ΔY

Question 17

Marginal Propensity to Save (MPS)

Answer 17

the proportion of extra disposable income that is saved.

Question 18

MPS =

Answer 18

ΔS / ΔY

Question 19

Relationship between MPC and MPS

Answer 19

MPC + MPS = 1

Question 20

MPC and MPS at low incomes

Answer 20

MPC is very high and MPS is very low.

Extra income tends to be spent.

Question 21

MPC and MPS as incomes rise

Answer 21

• MPC is low and MPS is high.

- Extra income tends to be saved.

Question 22

Consumption Function

Answer 22

relationship between income and consumption

Question 23

Consumption Function Formula

Answer 23

C = a + bY

```
C = Consumption
a = autonomous consumption
b = MPC
Y = disposable income
bY = induced consumption
~~~

Question 24

Consumption Function Graph (DRAW DIAGRAM)

Answer 24

• y-axis = consumption
• x-axis = disposable income

C = Y graph drawn at 45 degrees
Consumption function graph also drawn, which overlaps C = Y

Question 25

Autonomous consumption on consumption function graph

Answer 25

is shown where consumption function intersects the Y axis.

Question 26

Gradient of Consumption Function

Answer 26

∆C/∆Y

= the marginal propensity to consume (MPC)

Question 27

Steeper Consumption Function

Answer 27

Steeper consumption function means a higher MPC, due to:
- Lower income tax rates (especially for the poor).
- Lower interest rates.
- More availability of credit.
- Increased confidence about future income.
Vice versa

Question 28

Consumption Function Shift

Answer 28

Upward shift means more consumption at all levels of disposable income, caused by changes in: 
- interest rates 
- availability of credit 
- confidence 
- expectations 
- Wealth
Vice versa

Question 29

Saving Function

Answer 29

relationship between income and saving.

Question 30

Saving Function Formula

Answer 30

S = -a + sY

```
S = Saving
a = dissaving
s = MPS
Y = disposable income
sY = induced saving
~~~

Question 31

Saving Function Graph (DRAW DIAGRAM)

Answer 31

• y-axis = saving
• x-axis = disposable income
• graph begins below origin, then goes positive
  Dissaving (-a) shown where savings function intersects the Y-axis.

Question 32

Gradient of Saving Function

Answer 32

(∆S/∆Y)

= the marginal propensity to save (MPS).

Question 33

Steeper Saving Function

Answer 33

means higher MPS, due to:
- Higher interest rates.
- Low confidence.
- Temporary rise in income
Vice versa for lower MPS

Question 34

Relationship between graphs of consumption function and saving function

Answer 34

When the Consumption Function intersects with C = Y, the Saving Function crosses the x-axis

Question 35

Investment Meaning

Answer 35

spending by private sector firms on capital goods.

Question 36

Investment Determinants

Answer 36

• Level of consumer demand
• Interest rates
• Profit
• Corporation tax
• Technology
• Expectations
• Confidence
• Price of capital
• Subsidies

Question 37

Gross fixed capital formation

Answer 37

refers to the net increase in physical assets (investment minus disposals) within the measurement period

Question 38

Government Spending

Answer 38

spending by the government on goods and services

Question 39

Types of Government Spending

Answer 39

• Current spending: public sector spending e.g. salaries of public sector workers.
• Capital spending: infrastructure spending e.g. roads.
• Transfer spending: welfare spending e.g. unemployment benefits

Question 40

Net Exports Meaning

Answer 40

the difference between the value of exported goods and services and imported goods and services

Question 41

Net Exports Determinants

Answer 41

• Exchange rates
• • Depreciation (DECIM)
• • Appreciation (AEMIC)
• Marshall-Lerner condition / J-Curve
• Domestic and foreign incomes (marginal propensity to import)
• Relative prices of exports and imports
• Competitiveness (quality, branding, productivity)

Question 42

Equilibrium National Income

Answer 42

The level of real GDP where AE = Y is equal to AE = C + I + G + (x-M)