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Aggregate Expenditure
Chapter 14
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
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
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
Other Expenditures
• Imports
– Induced expenditure (imports depend on the level of
real GDP)
• Marginal propensity to import = Δ imports / Δ real GDP
• Exports
– Autonomous expenditure
• Investment
– Autonomous expenditure
• Government purchase
– Autonomous expenditure
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
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)
Expenditure Multiplier
Continued
– How to obtain the formula
• Assuming no government and no foreign sector,
ΔY= ΔC +ΔI
• 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.