30 2 Graphing Aggregate Expenditure Induced AND Autonomous

30. 2 Graphing Aggregate Expenditure Induced AND Autonomous Expenditure combined Induced = Consumption – imports Real GDP = CE and Imports, C includes purchase of imports, but we only want to look at domestic expenditures so we subtract the value of imported goods Induced Expenditure is directly related to RGDP Autonomous = Investment, Government , Exports & Auto. Con. E These change in relation to Interest rates, expectations, Gov’t policy priorities, and Global

Graphing Aggregate Expenditures 45* reference line = Keynesian Cross represents equilibrium between AE & RGDP AND where actual investment = planned investment AE Line = C + I + G + NX C – is a function of MPC and DI whereas the others are not dependent on income – when C changes is when AE changes Where Reference line and AE cross=equilibrium & a good estimate of RGDP

Graphing Aggregate Expenditures 1. 2. 3. 4. The lines are from the table below Notice the constants for the Autonomous Expenditures The Blue line includes imports The Red line is AE after value of imports has been subtracted

Equilibrium Expenditure -Point on the AE where aggregate planned expenditure=RGDP If planned AE is below the equilibrium businesses will have to sell stock/inventory because demand > supply on hand, this leads to greater investment to catch up and replace inventory so RGDP will increase and equilibrium is restored (this occurs when the line is above the reference line) If planned AE is above the equilibrium businesses have excess stock on hand begin to slow down production, this leads to lower RGDP and equilibrium is restored.

Gov’t Spending in AE Government Expenditures = part of Autonomous Expenditures, set by policies, but gov’t spending is typically funded by taxes which can affect disposable income higher G in formula should lead to higher AE, but if that spending is from higher taxes- the C would drop due to lower disposable income- so they might cancel each other out If economy is close to capacity- it can be negative due to crowding out affect If economy is in a large recessionary gap- it could pull people out of their financial holes So effects of Gov’t spending vary depending on state of economy when spending takes place and how that spending is funded

International Trade in AE Depends on whether we are looking at imports or exports Imports affect Induced Expend. in an inverse relationship Exports affect Autonomous in a direct relationship

Practice Problems p. 781