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AE Model and the Multiplier definitions

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  • Multiplier Effect
    An initial spending increase leads to a larger rise in GDP due to repeated rounds of income and consumption.
  • Aggregate Expenditure Model
    A framework showing how total spending determines GDP, including consumption, investment, government purchases, and net exports.
  • GDP
    The total value of production in an economy, reflecting the sum of all goods and services produced.
  • Consumption Function
    A mathematical relationship linking consumption to a base amount plus a portion of disposable income.
  • Marginal Propensity to Consume
    The fraction of additional income that is spent on consumption, influencing the slope of the aggregate expenditures line.
  • Disposable Income
    Income available to households after taxes, used for spending and saving.
  • Investment Spending
    Expenditures on capital goods that boost production and can trigger the multiplier effect.
  • Government Purchases
    Spending by the public sector on goods and services, which can stimulate economic activity.
  • Net Exports
    The value of exports minus imports, contributing to total aggregate expenditures.
  • Equilibrium GDP
    The level where total spending equals total production, found at the intersection of aggregate expenditures and the 45-degree line.
  • Aggregate Expenditures Curve
    A graphical representation of total spending at various GDP levels, with its slope determined by the marginal propensity to consume.
  • Slope
    A measure of how much aggregate expenditures change with GDP, determined by the marginal propensity to consume.
  • Fiscal Policy
    Government actions involving spending and taxation to influence economic growth, often using the multiplier effect.
  • Initial Spending Boost
    The original increase in investment, government purchases, or net exports that triggers the multiplier effect.
  • 45-Degree Line
    A reference line on the aggregate expenditures graph where spending equals production, used to find equilibrium GDP.