a) Aggregate Expenditure Schedule

    The aggregate expenditure schedule displays in table form the ‘planned’ expenditure components of GDP (MBB 10th Ed Fig. 7.14; MBB 11th ED Fig. 7.5; PB Fig. 25.5).        

b) Aggregate Expenditure Curve

    From the Aggregate Expenditure Schedule an Aggregate Expenditure Curve can be plotted (MBB 10th Ed Fig. 7.14; MBB 11th ED Fig. 7.5; PB Fig. 25.5).  There are two distinct types of expenditures: autonomous & induced.

    Autonomous expenditures are not influenced by the level of real GDP.  They include: I, G, X and autonomous consumption, i.e. what can be called 'a' which is non-discretionary or 'survival' spending.  Autonomous expenditures are made independent of the level of real GDP.  Accordingly, they are graphed as straight horizontal lines.

    Induced expenditures are influenced by the level of real GDP.  They include non-survival consumption plus most imports (excepting production goods).  However, with respect to impact on domestic GDP (that is domestic production of goods and services and payment for domestic factors of production), ‘induced expenditure’ are defined as non-survival consumption less imports, i.e. consumption of domestically produced goods and services.

c) Actual & Planned Expenditure and Real GDP

    Actual aggregate expenditure is always equal to real GDP.  Planned and actual aggregate expenditures or real GDP, however, can diverge.  How?  It is assumed that C, G, X & M planned expenditures will be fulfilled.  That leaves I as the component that can vary between planned and actual.  This is due to one facet of I, inventories.  When aggregate planned expenditure is less than actual, inventories increase; if planned is greater than actual, inventories shrink below the level firms wish to maintain them (inventory targets).  This sets up a dynamic in the next time period. Keynes's introduction of inventory adjustment led in the post-WWII period to recessions averaging about two quarters of a year.  Once inventories are run down, production starts up again.  Prior to recognition of this mechanism the duration of a recession was much longer, as much as 5 years.  Capital plant and equipment were run down and then replaced causing the upturn.

d) Equilibrium Expenditure

    Equilibrium expenditure is the level of planned aggregate expenditure that equals real GDP.  It can be represented as a 45* line drawn from the origin of a graph with the x-axis representing real GDP and the y-axis representing aggregate planned expenditures (MBB 10th Ed  Fig. 7.9; MBB 11th Ed. Fig. 7.2; PB Fig. 25.6).  If planned expenditure exceeds real GDP inventories are drawn down; if real GDP exceeds planned spending, inventories build up.  A dynamic processes of convergence sets in which tends to direct aggregate planned expenditure towards equilibrium at real GDP in manner of convergence or denouement.

2. 5 The Multiplier

a) Concept

    An increase in autonomous expenditure (I, G or X) increases equilibrium by more than increase in autonomous expenditure.  The multiplier is the rate of magnification or multiplication of increase in autonomous expenditure in terms of increased equilibrium expenditure and real GDP (MBB 10th Ed Fig. 7.14; MBB 11th ED Fig. 7.5; PB Fig. 25.7). 
         In many ways, the multiplier effect is like throwing a pebble into a pond.  The initial ripple is followed by other ripples that stretch further and further out across the pond.  Thus if investment suddenly increases because firms anticipate lower real interest rates or higher real profit rates, they invest (1st ripple).  To invest they buy factors of production from households which therefore receive more income which they spend (2nd ripple).  The goods and services purchased with this new income in turn are made by firms that hire more factors of production to increase production increases the income of other households which in turn increase their spending (3rd ripple).  And so on, and so on....

b) Size

    The increase in autonomous expenditure therefore ‘induces’ further increases in expenditure.   The size of the multiplier equals change in equilibrium expenditure divided by the change in autonomous expenditure.   Graphically, the size of the multiplier is determined by the slope of AE curve where: the multiplier = 1 /( 1 – slope of AE).   All things being equal, the steeper the slope of the AE curve, the larger the multiplier; the gentler the slope, the lower the multiplier (MBB 10th Ed Fig. 7.14; MBB 11th ED Fig. 7.5; PB Fig. 25.7).   It is important to note that the multiplier is a process that spreads out over time (MBB 10th Ed Fig. 7.11; MBB 11th Ed Fig. 6.8; PB Fig. 25.8).  In addition, the effect of the multiplier depends on the slope of the AE curve, i.e., MPC.

c) Consumption, Income Taxes & Imports

    The size of the multiplier depends on the slope of AE which, in turn, is determined by the marginal propensity to consume (MPC), the marginal tax rate (MTR) and the marginal rate of imports (MPM).  All things being equal: the higher MPC, the steeper the slope of AE; the higher MTR, the gentler the slope; the higher MPM, the gentler the slope.

d) Business Cycle

    Economist study the business cycles - the ups and downs of the economy (MBB 10th Edition Fig. 6.1; MBB 11th Ed Fig. 5.1).  They know and understand the forces that cause them but are still unable to predict them.   Essentially, an expansion is triggered by increase in autonomous expenditure, e.g. I up due to interest rates falling;  a recession is triggered by a decrease in autonomous expenditure, e.g. real GDP in rest of world declines and X fall.

e) Multiplier, Real GDP & Price Level

   Changes in business inventories can eventually lead to changes in prices, e.g. if sales exceed plan inventories decline and new production takes time, price may go up, and vice versa.
    As we will see aggregate demand is plotted on a graph with the x-axis representing  real GDP and the y-axis representing the price level (MBB 10th & 11th Eds Fig. A8.1; PB Fig. 25.10).  On the other hand, aggregate expenditure plots planned expenditure against real GDP.
    If inventory adjustments lead to price changes then real GDP can be effected through wealth and substitution effects.  If prices rise, wealth is affected because the value of financial assets is worth less in terms of goods and services they can purchase.  Therefore, households will plan to buy less.
    Similarly, higher prices today relative to anticipated lower prices tomorrow will lead households to substitute consumption tomorrow for today.    In addition, higher domestic prices means that exports decrease and imports increase.