Aggregate expenditure refers to the total amount of spending on final goods and services in an economy. It encompasses the spending by households, businesses, governments, and foreign entities, and is a key determinant of a country's overall economic activity and growth.
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Aggregate expenditure is the sum of consumption (C), investment (I), government spending (G), and net exports (NX), which can be expressed as the equation: AE = C + I + G + NX.
Changes in aggregate expenditure can lead to changes in real GDP, as higher spending typically results in increased production and economic growth.
The national saving and investment identity, as discussed in Chapter 10.4, states that national saving (S) must equal national investment (I) plus the current account balance (NX).
In Chapter 11.1, aggregate demand is determined by the aggregate expenditure function, which shows the relationship between the level of real GDP and the total amount of spending in the economy.
Factors that can shift the aggregate expenditure function include changes in consumer confidence, business investment, government policies, and the global economic environment.
Review Questions
Explain how the national saving and investment identity (S = I + NX) relates to the concept of aggregate expenditure.
The national saving and investment identity states that national saving (S) must equal national investment (I) plus the current account balance (NX). This identity is closely linked to aggregate expenditure because national saving and investment are components of the aggregate expenditure function (AE = C + I + G + NX). Changes in national saving and investment, as well as the current account balance, can directly impact the level of aggregate expenditure and, in turn, influence real GDP.
Describe how the aggregate expenditure function is used to determine aggregate demand in the macroeconomic framework discussed in Chapter 11.1.
In Chapter 11.1, the aggregate expenditure function is used to determine the relationship between the level of real GDP and the total amount of spending in the economy. The aggregate expenditure function shows that aggregate demand is the sum of consumption (C), investment (I), government spending (G), and net exports (NX). Changes in any of these components can shift the aggregate expenditure function, leading to changes in the equilibrium level of real GDP and, consequently, aggregate demand.
Evaluate the factors that can influence the aggregate expenditure function and discuss how these factors can impact economic growth and stability.
The aggregate expenditure function can be influenced by a variety of factors, including changes in consumer confidence, business investment, government policies, and the global economic environment. For example, an increase in consumer confidence may lead to higher consumption, shifting the aggregate expenditure function to the right and resulting in increased economic growth. Conversely, a decline in business investment or contractionary fiscal policies could shift the aggregate expenditure function to the left, leading to a decrease in real GDP and potentially causing economic instability. Understanding how these factors can impact the aggregate expenditure function is crucial for policymakers in managing the overall macroeconomic environment and promoting sustainable economic growth.
The spending by businesses on capital goods, such as machinery and equipment, as well as residential construction, which contributes to aggregate expenditure.
The expenditure by federal, state, and local governments on goods, services, and transfer payments, another significant component of aggregate expenditure.