The Aggregate Expenditure Model Flashcards
AE
aggregate expenditure
total of all spending in an economy
AE = C + I + G + (X-M)
Component of AE
consumption
investment
government expenditure
net exports
Consumption
expenditure on durables, non-durables and services
investment
spending on new capita goods and additions to inventories
business investment
housing investment
Ip
planned investment
businesses and residential investment
Ia
actual investment
planned investment and inventories
most volatile component of AE
investment
Government spending
federal, state, local and public investment in capital equipment and infrastructure
factors influencing consumption
disposable income expectations interest rates availability of credit stock of wealth
factors influencing investment
business expectations
interest rates
level of past profits
government policy’s
factors influencing government expenditure
discretionary changes in accordance to government policy’s (health, education etc…)
automatics changes in the business cycle (welfare)
can be sued to stabilize macroeconomic fluctuations
factors influencing net exports
level of domestics and overseas economic activity
exchange rates
terms of trade
presence of tariffs & quotas
MPC
Marginal propensity to consume
MPC = change in C / change in Y
MPS
Marginal propensity to save
MPS = change in S / change in Y
APC
average propensity to consume
overall proportion of income that is spent on consumption
APS
average propensity to save
the overall proportion of income that was saved
G1
spending on current goods
G2
spending on capital items and infrastructure
the multiplier effect
the ratio of the change in income caused by a change in spending
the value of k is determined by the MPC
multiplier calculation
k = change in Y / change in I k = 1 / ( 1 - MPC ) k = 1 / MPS
