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AE Model and the Multiplier definitions

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  • Multiplier Effect
    Describes how an initial increase in spending leads to a proportionally larger rise in GDP through repeated rounds of income and consumption.
  • Aggregate Expenditures
    Total planned spending in an economy, including consumption, investment, government purchases, and net exports.
  • Consumption Function
    Represents the relationship between consumption and disposable income, including a base level and a portion tied to income.
  • Marginal Propensity to Consume
    Fraction of additional income that households spend on consumption, determining the slope of the aggregate expenditures line.
  • Equilibrium GDP
    Level of output where total spending equals total production, found where the aggregate expenditures line crosses the 45-degree line.
  • Investment Spending
    Expenditures on capital goods that add to productive capacity, treated as a constant in the model unless changed.
  • Government Purchases
    Spending by the public sector on goods and services, considered a component of aggregate expenditures.
  • Net Exports
    Difference between a country's exports and imports, included as a constant in aggregate expenditures.
  • Slope of Aggregate Expenditures Line
    Determined by the marginal propensity to consume, it influences how much GDP changes in response to spending shifts.
  • Initial Spending Boost
    The original increase in investment, government purchases, or net exports that triggers the multiplier process.
  • 45-Degree Line
    Graphical tool where every point shows spending equals production, used to find equilibrium GDP.
  • Base Consumption
    Minimum level of consumption that occurs even when income is zero, forming part of the consumption function.
  • Aggregate Expenditures Curve
    Graph showing the relationship between total planned spending and GDP, shifting with changes in spending components.
  • Policy-Making
    Process where authorities use tools like government spending to influence GDP, especially during economic downturns.