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AE Model: Private Closed Economy definitions

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  • Aggregate Expenditures
    Total spending in an economy, represented by the sum of consumption and investment in a simplified model.
  • Private Closed Economy
    An economic system excluding government activity and international trade, focusing solely on households and firms.
  • Consumption
    Spending by households on goods and services, including a base level necessary for survival regardless of income.
  • Investment
    Expenditures by firms on capital goods, treated as a constant value in this simplified economic model.
  • Macroeconomic Equilibrium
    The point where total spending equals total production, shown where the aggregate expenditures line meets the 45-degree line.
  • GDP
    The total value of goods and services produced within an economy, serving as the measure of production.
  • Consumption Function
    A graphical representation showing how household spending changes with income, starting from a base level.
  • Marginal Propensity to Consume
    The fraction of additional income that households spend on consumption, determining the slope of the consumption function.
  • Aggregate Expenditures Line
    A graph plotting total spending (consumption plus investment) against GDP, used to find equilibrium.
  • 45-Degree Line
    A reference line on a graph where spending equals production, used to identify equilibrium points.
  • Base Consumption
    The minimum level of household spending that occurs even when income is zero, covering essential needs.
  • Multiplier Effect
    The process by which an initial change in spending leads to a larger change in total output, referenced for future discussion.