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AE Model: Graphing Macroeconomic Equilibrium definitions

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  • Aggregate Expenditures
    Total spending in an economy, including consumption, investment, government purchases, and net exports, used to determine equilibrium with production.
  • Macroeconomic Equilibrium
    A state where total spending matches total production, visually found where the aggregate expenditures line meets the 45-degree line.
  • Consumption Function
    A line showing how spending by households consists of a base amount plus a portion that rises with disposable income.
  • Marginal Propensity to Consume
    The fraction of each additional dollar of income that is spent, represented as the slope of the consumption line.
  • Disposable Income
    Income available to households after taxes, which determines how much is spent or saved.
  • Investment
    Constant spending by firms on capital goods, which shifts the aggregate expenditures line upward without changing its slope.
  • Government Purchases
    Constant public sector spending on goods and services, raising the aggregate expenditures line's intercept.
  • Net Exports
    The value of exports minus imports, treated as a constant that shifts the aggregate expenditures line upward.
  • 45-Degree Line
    A reference line on the graph where every point shows spending exactly equals production, indicating equilibrium.
  • GDP
    The total value of goods and services produced, represented on the horizontal axis and equated with production.
  • Y-Intercept
    The point where a line crosses the vertical axis, indicating the base level of spending before income effects.
  • Slope
    The rate at which spending increases as income rises, determined by the marginal propensity to consume in this model.
  • Parallel Lines
    Lines with identical slopes, showing that adding investment, government purchases, or net exports shifts but does not tilt the spending line.