[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

AGGREGATE EXPENDITURES (AE )
45°
Figure 30.1
Y 2
E 0
Y 0
Y 1
INCOME = OUTPUT (Y )
Aggregate
expenditures
= output
Aggregate
expenditures
schedule
THE AGGREGATE
EXPENDITURES SCHEDULE AND
INCOME–EXPENDITURE ANALYSIS
The aggregate expenditures schedule gives the
sum of consumption, investment, government purchases,
and net exports at each level of national
income. Aggregate expenditures increase with
income. Equilibrium occurs at the intersection of
the aggregate expenditures schedule and the
45-degree line, where aggregate expenditures
equal income (at point E 0 ). At outputs greater than
Y 0 , such as Y 1 , aggregate expenditures are less
than output (remember, income equals output).
Some goods that are being produced are not
being sold; there are unintended accumulations of
inventory. The reverse is true for outputs less than
Y 0 , such as Y 2 .
total expenditures in the four parts of the economy: households spending on
consumption, firms on investment goods, the government on public goods, and
foreigner buyers on net exports. We have already seen in Chapter 22 that
total income (output) is equal to the sum of consumption, investment, government
purchases, and net exports. Income depends on spending, but spending
also depends on income. When their income rises, for example, households
will increase their consumption spending. This spending then becomes income
for the producers of the goods and services purchased. Understanding the
implications of this feedback loop is critical to understanding why the
economy experiences fluctuations in production and employment.
The key to solving for the equilibrium level of output and the equilibrium
level of aggregate demand is the aggregate expenditures schedule.
The aggregate expenditures schedule traces out the relationship between
aggregate expenditures and national income—the aggregate income of
everyone in the economy. It is depicted in Figure 30.1, where the vertical
axis measures aggregate expenditures and the horizontal axis measures
national income.
The aggregate expenditures schedule has three critical properties. First, it
is upward sloping—as national income goes up, so do aggregate expenditures.
Changes in other variables (such as interest rates, tax rates, and exchange
rates) cause the aggregate expenditures schedule to shift up or down, and they
may even alter its slope. Later in this chapter, we will examine why expenditures
increase with income and how the aggregate expenditures schedule is
shifted by changes in other variables.
Second, as income increases by $1 billion, aggregate expenditures increase
by less than $1 billion—consumers save some of their additional income. If a
household’s income increases by $1,000, its consumption might rise by $900
and its saving by $100. The same logic applies to other components of aggregate
expenditures; they will rise less than the increase in income. Figure 30.1
also shows a line through the origin at a 45-degree angle. The slope of this
line is one. All along this line, a change in the horizontal axis (income) is
matched by an equal change in the vertical axis (aggregate expenditures).
By contrast, the aggregate expenditures schedule is flatter than the 45-degree
line, since aggregate expenditures increase less than dollar-for-dollar with
increased income.
Third, at very low levels of national income, aggregate expenditures will exceed
income. Households, for example, will use up their savings to maintain consumption
if aggregate income falls to dramatically lower levels.
The facts that (1) the aggregate expenditures schedule slopes up, (2) the aggregate
expenditures schedule is flatter than the 45-degree line through the origin, and
(3) aggregate expenditures are greater than income at very low income levels imply
that the aggregate expenditures schedule intersects the 45-degree line, as seen in
Figure 30.1.
This brings us to our central questions: What determines the (short-run) equilibrium
level of aggregate expenditures? Where on the schedule in Figure 30.1 will
the economy find itself? To answer these questions, we need to add two more concepts
to our analysis.
662 ∂ CHAPTER 30 AGGREGATE EXPENDITURES AND INCOME