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AE Model: Graphing Macroeconomic Equilibrium definitions

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  • Aggregate Expenditures
    Total spending in an economy, including consumption, investment, government purchases, and net exports, used to determine equilibrium with real GDP.
  • Macroeconomic Equilibrium
    State where total spending equals total production, visually found at the intersection of the aggregate expenditures line and the 45-degree line.
  • Real GDP
    Measure of production in the economy, represented on the x-axis of the aggregate expenditures model graph.
  • Consumption Function
    Linear relationship showing how spending on goods and services changes with income, starting from a base level even with zero income.
  • Autonomous Consumption
    Constant amount of spending that occurs regardless of income, forming the intercept of the consumption function.
  • Marginal Propensity to Consume
    Fraction of additional income spent on consumption, represented as the slope of the consumption function line.
  • Investment
    Constant spending by firms on capital goods, which shifts the aggregate expenditures line upward without altering its slope.
  • Government Purchases
    Constant spending by the public sector, contributing to upward shifts in the aggregate expenditures line.
  • Net Exports
    Difference between exports and imports, treated as a constant in the model and shifting the aggregate expenditures line upward.
  • 45-Degree Line
    Graphical line where spending equals production, used to visually identify macroeconomic equilibrium in the AE model.
  • Equilibrium GDP
    Level of production where total spending matches output, found at the intersection of the aggregate expenditures and 45-degree lines.
  • Y-Intercept
    Point where a function crosses the vertical axis, indicating base spending levels in the aggregate expenditures model.
  • Slope
    Rate at which spending increases with income, determined by the marginal propensity to consume in the consumption function.
  • Disposable Income
    Income available for spending after taxes, used in calculating consumption within the aggregate expenditures model.
  • Aggregate Expenditures Line
    Graphical representation of total spending, built by adding constant components to the consumption function and shifting it upward.