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AE Model: Components definitions

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Terms in this set (14)

  • Aggregate Expenditure
    Total planned spending in an economy, including consumption, investment, government purchases, and net exports.
  • Consumption
    Household spending on goods and services, influenced by factors like income, wealth, and interest rates.
  • Disposable Income
    Money available to households after taxes, directly affecting their ability to spend or save.
  • Wealth
    Value of owned assets such as property and investments, supporting higher spending levels.
  • Price Level
    Average of current prices across the economy, impacting purchasing power and spending decisions.
  • Interest Rate
    Cost of borrowing or reward for saving, shaping both consumer spending and business investment.
  • Consumption Function
    Relationship showing how household spending changes as disposable income changes.
  • Marginal Propensity to Consume
    Portion of each additional dollar of income that is spent rather than saved.
  • Investment
    Business spending on capital goods like equipment and buildings, driven by profit expectations and costs.
  • Future Profits
    Anticipated earnings that motivate firms to increase or decrease capital spending.
  • Cash Flow
    Funds generated from business operations, enabling further investment in productive assets.
  • Net Exports
    Difference between a country's exports and imports, influenced by exchange rates and economic growth.
  • Exchange Rate
    Value of one currency relative to another, affecting the affordability of foreign and domestic goods.
  • GDP Growth
    Increase in a nation's output, affecting income levels and demand for both domestic and foreign products.