Chapter 21 Notes
1) A) The equation for actual national income from the expenditure side is written as GDA = A + A + GA+ (XA– IM )
B) The equation for desired aggregate expenditure is: AE = C + I + G + (X – IM)
C) National income accounts measure actual expenditure in four broad categories. National income theory deals
with desired expenditure in the same four categories.
D) The equation for a simple consumption function is written as C = a + bY. The letter a represents the autonomous
part of consumption. The letter bY represents the induced part of consumption. When graphing a consumption function,
the vertical intercept of the function is given by the letter a, and the slope of the function is given by the letter b.
E) In the simple macro model of this chapter, all investment is treated as autonomous expenditure, meaning that is is
unaffected by changes in national income.
F) The aggregate expenditure function in the simple macro model is written as AE = C + I, and is graphed with
desired consumption expenditure on the vertical axis, and disposable income on the horizontal axis.
G) An example of an aggregate expenditure function is AE = $47 billion + 0.92Y. Autonomous expenditure is $47
billion and the marginal propensity to spend out of national income is 0.92. In the simple model in this chapter, the
marginal propensity to spend is the same as the marginal propensity to consume because governments and imports,
exports are not included.
2) A) If actual national income is $200 billion and desired aggregate expenditure is $180 billion, inventories may begin
to accumulate, firms will reduce the level of output, and national income will decrease.
B) If actual national income is $200 billion, and desired aggregate expenditure is $214 billion, inventories may
begin to fall, firms will increase the level of output, and national income will rise.
C) If household experience and increase in wealth that leads to an increase in desired consumption, the AE curve