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Aggregate Expenditure
Aggregate
Expenditureis ameasure of
national income. It is defined as the
current value of all the finished goods and
services in the economy.
It is the sum total of all the expenditures
undertaken in the economy by the factors
during a given time period.
Aggregate Expenditures is defined as:
AE = C+Ip+G+Xn,here,
C
Ip
G
Xn
= Household Consumption
= Planned Investment
= Government spending
= Net exports (Exports-Imports)
Aggregate Expenditure
Aggregate
Aggregate Expenditure
Components
ofAggregate
Expenditure(AE) - defined as the total
amount that firms and households plan to
spend on goods and services at each level
of income.
It is normally derived from all the
components of theAggregate Demand.
Aggregate demand (AD) refers to the
sum total of goods that are demanded in an
economy over a period and thus AD is
defined by the planned total expenditure in
an economy for a given price level.
Consumption
The
The
total household
consumption can be
divided into two parts,
they are:
Autonomous
consumption refers to
the amount of
consumption regardless
of the amount of income,
hence, even if the income
is zero, the autonomous
consumption would be
the total consumption.
Induced
consumption
refers to the level of
consumption dependent
on the level of income.
Keynes
This
Non-income determinants of C
Net
wealth
in net wealth
Spend less
C decreases
C function shifts down
Non-income determinants of C
Changes
in price level
Increase S
Non-income determinants of C
Interest
rate
Non-income determinants of C
Consumer
expectations
Real consumption
C
C
C
Ex.
Given a change in your disposable
income (DY) equal to PHP 100,000
and you decide to save PHP 20,000
of that extra income, how much will
the multiplier be?
Sol. DY=C+S compute the value of C
C=DY-S
C= 100,000-20,000
C= 80,000
change in C
change in DY
MPC=80,000/100,000 =
0.8
m=
1
1 MPC
1 / 1 - 0.8
1 / 0.2
m=5
=
MPS
C= total consumption ;
Y= income;
a= initial consumption
b= MPC or the marginal
propensity to consume
Consumption Function
C = 80,000+0.8Y
Since the equilibrium level of Y is AE,
we can express the equilibrium
condition as Y=C. Substituting the
value of C in the equilibrium
condition, we get:
C=a + bY
Y =80,000+0.8Y
Y-0.8Y =80,000
0.2Y = 80,000
Y =400,000
0.2
0.2
a=80,000
G= 25,000
Y=C+I+G
Y = a+bY+I+G
Y=
80,000+0.8Y+20,000+25,000
Y-0.8Y =
80,000+20,000+25,000
0.2Y = 125,000
0.2
0.2
Y = 625,000