Total income = sum of wages, interest, rent, and profit = total expenditure
Total value of production equals total value of income because all expenditure on goods/services must appear as someone’s income.
Aggregate Expenditure & GDP
If… Inventories... GDP & Employment 45° Line Firm Actions
AE = GDP Are unchanged Macroeconomic Intersects 45° line None.
.AE < GDP Rise GDP and employment Below 45° line Cut back production, reducing
decrease employment. Cut back purchases.
AE > GDP Fall GDP and employment Above 45° line Increase production, increasing
increase employment. Increase purchases.
– If inflation in US lower, then prices of US products increase slower than other countries
– When incomes in US rise more slowly than in other countries, net exports rise
– As value of US dollar rises, foreign currency price of US products rise, and dollar price of foreign products sold in
US falls (if US dollar value high, then more imports)
– ↑MPC , ↑multiplier
– Effect smaller when tax rates higher or marginal propensity to import (MPI) higher
– An increase in autonomous expenditure leads to a larger increase in real GDP
Aggregate Expenditure: Increases when prices fall and decreases when prices rise (effects equilibrium between AE & GDP)
– Change in price = move along curve
– Shifts right: ↑ government purchases, ↑ household’s expectations of future incomes
– Shifts left: ↑ firm’s expectations of future profitability of investment, ↑ interest rates, ↑ personal income or business taxes (causes
↓ consumption spending and ↓ investment), ↑ growth rate of domestic GDP vs. foreign (↓ net exports), ↑ exchange rate (↓ net
If Price Falls… ↑consumption & investment, ↓ interest rates, ↓ imports because domestic products more competitive, ↑ net
exports because more competitive in foreign markets and reduced ex