ECON202 Chapter 5.4: Aggregate Planned Expenditure
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5.4 Aggregate Planned Expenditure
We have a good idea of how consumption works, and some preliminary idea of the size and
variability of the components of aggregate expenditure.
• We are now going to develop a basic model of aggregate spending/expenditure (AE) and what
factors affect aggregate spending, and how changes in aggregate spending lead to changes in
the level of production Y.
• This is our first building block model, to be able to understand key components of the
• We are going to make things a little simpler by assuming initially that there are no changes in
the aggregate price level.
We now wish to find the point of equilibrium expenditure.
• Equilibrium expenditure occurs when aggregate planned expenditure equals real GDP.
• In other words, when planned spending equals actual production – this is an equilibrium
because everyone who wants to buy something can find some goods/services to buy, and
everyone who wants to sell something can find a buyer.
Aggregate planned expenditure is the sum of planned consumption, planned investment,
planned government purchases and planned net exports in our simplified example.
(5.9) AEp = Cp + Ip + Gp + NXp.
We need to see how the economy arrives at an equilibrium, and then use this understanding to
see how the economy adjusts in the face of a shock to the system in Module 6.
Planned consumption expenditure comes from our consumption function:
(5.2) C p = a + bYD.
• YD = Y – T is disposable income , and T is net taxes .
• We will start out by assuming that T = t0 only . This is autonomous taxes (taxes that do NOT
vary with income), no income tax for the moment.
• Substituting in these values gives us our simple planned consumption function:
(5.10) Cp = (a – bt0) + bY.
This gives us the relationship of Cp to Y .
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