Skip to main content
Back

AE Model: Private Closed Economy definitions

Control buttons has been changed to "navigation" mode.
1/14
  • Aggregate Expenditures
    Total spending in an economy, including only consumption and investment in a private closed system.
  • GDP
    Measure of production in an economy, equal to aggregate expenditures at equilibrium in this model.
  • Private Closed Economy
    Economic system with no government involvement and no international trade.
  • Consumption
    Spending by households, modeled with a base amount plus a portion dependent on income.
  • Investment
    Spending by firms, treated as a constant value in the simplified model.
  • Consumption Function
    Equation showing how spending by households depends on a base amount and income.
  • Marginal Propensity to Consume
    Fraction of additional income that is spent on consumption, represented as the slope in the function.
  • Macroeconomic Equilibrium
    Point where total spending equals total production, shown by intersection of AE and 45-degree line.
  • 45-Degree Line
    Graphical representation where spending equals production, used to find equilibrium.
  • Aggregate Demand
    Total demand for goods and services, simplified to consumption and investment in this model.
  • Base Consumption
    Minimum level of household spending that occurs even with zero income.
  • Multiplier Effect
    Phenomenon where changes in spending lead to greater changes in output, discussed in later lessons.
  • Equilibrium Price
    Price level at which total spending matches total production in the economy.
  • Income
    Amount earned from production, used as a variable in the consumption function.