 ## Macroeconomics

Learn the toughest concepts covered in your Macroeconomics class with step-by-step video tutorials and practice problems.

Deriving the Aggregate Expenditures Model

# AE Model: Algebraic Approach

1
concept

## Algebraic Approach to the AE Model 2m
Play a video:
So here we go, we're gonna use algebra. Now we're going to use an algebraic approach to calculate our macro economic equilibrium where our aggregate expenditures equal are real GDP, let's check it out. So we're gonna use for uh some linear equations rather than a graph or just numerical numbers uh to solve for this equilibrium, where we're gonna have our aggregate expenditures equal our GDP, right, We're looking for that point where aggregate expenditures equal G. D. P. And we're gonna have to use a line for our aggregate expenditures. And we're gonna we're gonna use algebra to back into our GDP. Okay, so remember when we calculate aggregate expenditures, we're gonna have our consumption, which is gonna be some base amount of consumption A plus MPC times why write our disposable income? And we're not gonna generally we're not gonna uh differentiate between income and disposable income. It's generally just gonna be y just like this and all of these other ones are gonna be constant. Okay, they can throw some tricks at you that I'm gonna definitely show you as we go through some examples, but in general they're just constant numbers. So the macroeconomic equilibrium can be stated at the point where y R G D. P equals C plus I plus G plus N X. Which is our aggregate expenditures. Okay, so we're gonna be looking for this point where Y equals C plus I plus G plus N X. Now the trickiest part here is that when we solve for consumption. Well, remember consumption depends on GDP. So there's this kind of relationship, whereas GDP goes up, consumption goes up. So they kind of both go up together so they since consumption depends on GDP, we're gonna have this situation where we're calculating Y. D. But it's dependent on why, right? Because how did we see that the higher GDP leads to higher disposable income? Because the G. D. P. Remember we're producing more, we're hiring more people, there's more people employed making more money, which in turn leads them to consume more. So this higher disposable income leads to higher consumption. Okay, so that's the biggest trick here and we'll go through an example to see how we do this, but we're gonna have to use the the GDP number to calculate our consumption. Alright, so let's pause here and let's go through an example together and then you guys can practice
2
example

## Aggregate Expenditures 4m
Play a video:
3
Problem

Use the following information to solve for macroeconomic equilibrium (T is a lump-sum tax):

C = 1,500 + 0.75(Y-T)

I = 3,400

G = 2,600 + T

X = 750

M = 2,000

T = 500 