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💸principles of economics review

key term - Autonomous Expenditure

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Definition

Autonomous expenditure refers to the component of total expenditure that is independent of the level of income. It represents the amount of spending that occurs regardless of changes in a country's income level, and is a fundamental building block of Keynesian economic analysis.

5 Must Know Facts For Your Next Test

  1. Autonomous expenditure is the portion of total expenditure that is not dependent on the level of income, such as government spending, investment spending, and consumer spending on necessities.
  2. Changes in autonomous expenditure lead to changes in aggregate demand, which in turn affect the equilibrium level of national income through the multiplier effect.
  3. The size of the multiplier depends on the marginal propensity to consume, which determines how much of an increase in income will be spent on consumption.
  4. Autonomous expenditure is a key component of Keynesian economic analysis, as it helps explain how changes in spending can lead to fluctuations in economic output and employment.
  5. Policymakers can use changes in autonomous expenditure, such as adjusting government spending or investment incentives, to influence the level of economic activity and achieve desired macroeconomic goals.

Review Questions

  • Explain how autonomous expenditure differs from induced expenditure and how the two components together make up aggregate demand.
    • Autonomous expenditure is the component of total expenditure that is independent of the level of income, while induced expenditure varies directly with the level of income. Autonomous expenditure includes spending that occurs regardless of changes in a country's income level, such as government spending, investment spending, and consumer spending on necessities. Induced expenditure, on the other hand, represents the amount of spending that changes as a result of changes in a country's income level. Together, autonomous and induced expenditures make up aggregate demand, which is the total demand for all final goods and services in an economy at a given time and price level.
  • Describe the role of the multiplier effect in the relationship between autonomous expenditure and equilibrium national income.
    • The multiplier effect is a key concept in understanding the relationship between autonomous expenditure and equilibrium national income. When there is a change in autonomous expenditure, it leads to a larger change in equilibrium national income due to the circular flow of income and the propensity to consume. The size of the multiplier depends on the marginal propensity to consume, which determines how much of an increase in income will be spent on consumption. As a result, a change in autonomous expenditure can have a significant impact on the overall level of economic activity and employment through the multiplier effect.
  • Analyze how policymakers can use changes in autonomous expenditure to influence macroeconomic goals, such as economic growth and employment.
    • Policymakers can use changes in autonomous expenditure as a tool to influence macroeconomic goals, such as economic growth and employment. By adjusting government spending, investment incentives, or other components of autonomous expenditure, policymakers can affect the level of aggregate demand in the economy. An increase in autonomous expenditure will lead to a larger increase in equilibrium national income through the multiplier effect, potentially boosting economic growth and employment. Conversely, a decrease in autonomous expenditure can be used to cool an overheated economy and reduce inflationary pressures. Therefore, understanding the role of autonomous expenditure and the multiplier effect is crucial for policymakers in achieving their desired macroeconomic outcomes.