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    Aggregate Expenditure Explanation

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    Jacky Li
    1) The government spends $150, taxes $100, and has a budget deficit of -$50. 2) Businesses invest $150. 3) Household consumption is $100 + 0.6 times national income, and savings is national income minus taxes and consumption. 4) Equilibrium occurs when aggregate expenditure equals national income of $1000. At this level, consumption is $700, the budget deficit is -$50, investment is $150, and savings is $200.

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    Aggregate Expenditure Explanation

    Uploaded by

    Jacky Li
    51 views2 pages
    1) The government spends $150, taxes $100, and has a budget deficit of -$50. 2) Businesses invest $150. 3) Household consumption is $100 + 0.6 times national income, and savings is national income minus taxes and consumption. 4) Equilibrium occurs when aggregate expenditure equals national income of $1000. At this level, consumption is $700, the budget deficit is -$50, investment is $150, and savings is $200.

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    This contains AE explanations and exercises

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    Aggregate Expenditure explanation

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    1) The government spends $150, taxes $100, and has a budget deficit of -$50. 2) Businesses invest $150. 3) Household consumption is $100 + 0.6 times national income, and savings is national income minus taxes and consumption. 4) Equilibrium occurs when aggregate expenditure equals national income of $1000. At this level, consumption is $700, the budget deficit is -$50, investment is $150, and savings is $200.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    51 views2 pages

    Aggregate Expenditure Explanation

    Uploaded by

    Jacky Li
    1) The government spends $150, taxes $100, and has a budget deficit of -$50. 2) Businesses invest $150. 3) Household consumption is $100 + 0.6 times national income, and savings is national income minus taxes and consumption. 4) Equilibrium occurs when aggregate expenditure equals national income of $1000. At this level, consumption is $700, the budget deficit is -$50, investment is $150, and savings is $200.

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    Aggregate Expenditure

    Government: G, T (indirect), B = T G
    G = 150
    T = 100
    B = 100-150 = -50
    Business: Gross Capital Formation I = I (I, opportunity cost, Y) = I = 150
    Household: Consumption C, Saving S

    C=C0 +C 1 (Y T )
    C = 160 + 0.6 (Y T)

    C0 is called autonomous consumption depends on confidence, wealth


    S=YTC
    C = 160 + 0.6 (Y 100)
    C = 100 + 0.6Y
    S = Y 100 (100 + 0.6Y)
    S = 0.4Y 200
    GraphSketcher

    Equilibrium
    AE = Z = C + I + G
    AE = Y
    Z = (100 + 0.6Y) + (150) + (150)
    Z = 400 + 0.6Y
    Y=Z
    0.4Y = 400
    Y = 1000
    C = 100 + 0.6(1000) = 700
    B = 100 150 = -50
    I = 150
    S = 0.4Y 200 = 0.4(1000) 200 = 200
    NOTE: Households save 200 in the bank, businesses need to borrow 150 to finance investment,
    governments need to borrow 50 to finance budget deficit, so always get S + B = I

    Paradox of saving: If all of us spend less, economy enters recession, when we try to save more,
    we will end up saving less

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