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Short-Term Economic Fluctuations - Planned aggregate expenditure

Q: PAE can be divided into two parts:

Autonomous expenditure: the portion of planned aggregate expenditure that is independent of output Induced expenditure: the portion of planned aggregate expenditure that depends on output Y

4 important questions on Short-Term Economic Fluctuations - Planned aggregate expenditure

In the Keynesian theory, output at each point is determined by the amount that people throughout the economy want to spend This total planned spending on final goods and services is called the planned aggregate expenditure (PAE). Four components sum to total/ aggregate spending:

Consumer expenditure/consumption (C) by households
Investment (I) by firms on new capital goods and inventories
Governmental purchases (G)
Net exports (NX) equals exports minus imports, which represents the net demand for domestic goods by foreigners

While many factors are relevant, a particularly important determinant of the amount people plan to consume is there after-tax, or disposable income. A consumption function is:

The relationship between consumption spending and its determinants, in particular disposable income. Defined as C = c̅ + c(Y-T). The first term, c̅ is a constant term in the equation that is intended too capture factors other than disposable income that affect consumption. The second term reflects the effect of disposable income (Y-T) on consumption.

The marginal propensity to consume (MPC) or c, is:

The amount by which consumption rises when disposable income rises by one euro; we assume that 0 < c < 1

PAE can be divided into two parts:

Autonomous expenditure: the portion of planned aggregate expenditure that is independent of output
Induced expenditure: the portion of planned aggregate expenditure that depends on output Y

The question on the page originate from the summary of the following study material:

Principles of economics | 9780077132736 | Moore McDowell

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