The Aggregate Expenditure Model

Question 1

AE

Answer 1

aggregate expenditure
total of all spending in an economy
AE = C + I + G + (X-M)

Question 2

Component of AE

Answer 2

consumption
investment
government expenditure
net exports

Question 3

Consumption

Answer 3

expenditure on durables, non-durables and services

Question 4

investment

Answer 4

spending on new capita goods and additions to inventories
business investment
housing investment

Question 5

Ip

Answer 5

planned investment

businesses and residential investment

Question 6

Ia

Answer 6

actual investment

planned investment and inventories

Question 7

most volatile component of AE

Answer 7

investment

Question 8

Government spending

Answer 8

federal, state, local and public investment in capital equipment and infrastructure

Question 9

factors influencing consumption

Answer 9

disposable income
expectations 
interest rates 
availability of credit 
stock of wealth

Question 10

factors influencing investment

Answer 10

business expectations
interest rates
level of past profits
government policy’s

Question 11

factors influencing government expenditure

Answer 11

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

Question 12

factors influencing net exports

Answer 12

level of domestics and overseas economic activity
exchange rates
terms of trade
presence of tariffs & quotas

Question 13

MPC

Answer 13

Marginal propensity to consume

MPC = change in C / change in Y

Question 14

MPS

Answer 14

Marginal propensity to save

MPS = change in S / change in Y

Question 15

APC

Answer 15

average propensity to consume

overall proportion of income that is spent on consumption

Question 16

APS

Answer 16

average propensity to save

the overall proportion of income that was saved

Question 17

G1

Answer 17

spending on current goods

Question 18

G2

Answer 18

spending on capital items and infrastructure

Question 19

the multiplier effect

Answer 19

the ratio of the change in income caused by a change in spending
the value of k is determined by the MPC

Question 20

multiplier calculation

Answer 20

k = change in Y / change in I
k = 1 / ( 1 - MPC )
k = 1 / MPS