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Autonomous and Induced Consumption
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- Plotting the Aggregate Expenditures Curve
- The Slope of the Aggregate Expenditures Curve
Autonomous and Induced ConsumptionThe concept of the marginal propensity to consume suggests that consumption contains induced aggregate expenditures; an increase in real GDP raises consumption. But consumption contains an autonomous component as well. The level of consumption at the intersection of the consumption function and the vertical axis is regarded as autonomous consumption; this level of spending would occur regardless of the level of real GDP. Consider the consumption function we used in deriving the schedule and curve illustrated in Figure 13.2 "Plotting a Consumption Function": C = $300 billion + 0.8Y We can omit the subscript on disposable personal income because of the simplifications we have made in this section, and the symbol Y can be thought of as representing both disposable personal income and GDP. Because we assume that the price level in the aggregate expenditures model is constant, GDP equals real GDP. At every level of real GDP, consumption includes $300 billion in autonomous aggregate expenditures. It will also contain expenditures “induced” by the level of real GDP. At a level of real GDP of $2,000 billion, for example, consumption equals $1,900 billion: $300 billion in autonomous aggregate expenditures and $1,600 billion in consumption induced by the $2,000 billion level of real GDP. Figure 13.7 "Autonomous and Induced Consumption" illustrates these two components of consumption. Autonomous consumption, Ca, which is always $300 billion, is shown in Panel (a); its equation is
Induced consumption Ci is shown in Panel (b); its equation is Equation 13.8 Ci = 0.8Y The consumption function is given by the sum of Equation 13.7 and Equation 13.8; it is shown in Panel (c) of Figure 13.7 "Autonomous and Induced Consumption". It is the same as the equation C = $300 billion + 0.8Yd, since in this simple example, Y and Ydare the same. Figure 13.7 Autonomous and Induced Consumption  C C C
Plotting the Aggregate Expenditures CurveIn this simplified economy, investment is the only other component of aggregate expenditures. We shall assume that investment is autonomous and that firms plan to invest $1,100 billion per year. Equation 13.9 IP = $1,100 billion The level of planned investment is unaffected by the level of real GDP. Aggregate expenditures equal the sum of consumption C and planned investment IP. The aggregate expenditures function is the relationship of aggregate expenditures to the value of real GDP. It can be represented with an equation, as a table, or as a curve. We begin with the definition of aggregate expenditures AE when there is no government or foreign sector: Equation 13.10 AE = C + IP Substituting the information from above on consumption and planned investment yields (throughout this discussion all values are in billions of base-year dollars) AE = $300 + 0.8Y + $1,100 or
AE = $1400 + 0.8Y Equation 13.11 is the algebraic representation of the aggregate expenditures function. We shall use this equation to determine the equilibrium level of real GDP in the aggregate expenditures model. It is important to keep in mind that aggregate expenditures measure total planned spending at each level of real GDP (for any given price level). Real GDP is total production. Aggregate expenditures and real GDP need not be equal, and indeed will not be equal except when the economy is operating at its equilibrium level, as we will see in the next section. In Equation 13.11, the autonomous component of aggregate expenditures is $1,400 billion, and the induced component is 0.8Y. We shall plot this aggregate expenditures function. To do so, we arbitrarily select various levels of real GDP and then useEquation 13.10 to compute aggregate expenditures at each level. At a level of real GDP of $6,000 billion, for example, aggregate expenditures equal $6,200 billion:
The table in Figure 13.8 "Plotting the Aggregate Expenditures Curve" shows the values of aggregate expenditures at various levels of real GDP. Based on these values, we plot the aggregate expenditures curve. To obtain each value for aggregate expenditures, we simply insert the corresponding value for real GDP into Equation 13.11. The value at which the aggregate expenditures curve intersects the vertical axis corresponds to the level of autonomous aggregate expenditures. In our example, autonomous aggregate expenditures equal $1,400 billion. That figure includes $1,100 billion in planned investment, which is assumed to be autonomous, and $300 billion in autonomous consumption expenditure. Figure 13.8 Plotting the Aggregate Expenditures Curve  AE Equation 13.10
The Slope of the Aggregate Expenditures CurveThe slope of the aggregate expenditures curve, given by the change in aggregate expenditures divided by the change in real GDP between any two points, measures the additional expenditures induced by increases in real GDP. The slope for the aggregate expenditures curve in Figure 13.8 "Plotting the Aggregate Expenditures Curve" is shown for points B and C: it is 0.8. In Figure 13.8 "Plotting the Aggregate Expenditures Curve", the slope of the aggregate expenditures curve equals the marginal propensity to consume. This is because we have assumed that the only other expenditure, planned investment, is autonomous and that real GDP and disposable personal income are identical. Changes in real GDP thus affect only consumption in this simplified economy. Directory: site -> textbooks textbooks -> This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 0 License without attribution as requested by the work’s original creator or licensee. Preface textbooks -> This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 0 License without attribution as requested by the work’s original creator or licensee. Preface Introduction and Background textbooks -> Chapter 1 Introduction to Law textbooks -> 1. 1 Why Launch! textbooks -> This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 0 License without attribution as requested by the work’s original creator or licensee textbooks -> This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 0 License textbooks -> This text was adapted by The Saylor Foundation under a textbooks -> This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 0 License without attribution as requested by the work’s original creator or licensee. Preface textbooks -> Chapter 1 What Is Economics? textbooks -> This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 0 License Download 3.61 Mb. Share with your friends:
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