Comprehensive Review of Aggregate Expenditure, Demand, Supply, and Money

Aggregate Expenditure (AE)

Total planned spending in the economy.

Macroeconomic Equilibrium

Occurs when planned AE = actual GDP (no unplanned inventory changes).

Consumption (C)

Spending by households.

Planned Investment (Iₚ)

Intended business spending on capital.

Government Purchases (G)

Government spending on goods/services.

Net Exports (NX)

Exports minus imports.

Planned Investment

Businesses' intended spending.

Actual Investment

Planned + unplanned inventory changes.

Consumption Function

C=C₀+(MPC)(Yₑ)

C₀

Autonomous consumption (spending with zero income).

Yₑ

Disposable income.

Marginal Propensity to Consume (MPC)

ΔC / ΔY

Marginal Propensity to Save (MPS)

1 - MPC (Example: if MPC = 0.8 → MPS = 0.2)

Autonomous Expenditures

Spending independent of income (e.g., government purchases, fixed investment, C₀).

Graphing AE and Equilibrium

45° line: points where AE = GDP.

Out-of-Equilibrium Scenarios

AE > GDP → unplanned ↓ inventories → production ↑

The Multiplier

Multiplier = 1 / (1 - MPC)

Aggregate Demand (AD)

Shows relationship between price level and quantity of real GDP demanded.

Why AD Slopes Downward

Wealth effect: ↑ price level → ↓ real wealth → ↓ consumption.

Short-Run vs Long-Run Aggregate Supply

SRAS: upward sloping because wages and input prices are sticky.

Shifts of SRAS

Right (↑ SRAS): ↓ input costs, ↑ productivity, ↓ expected future prices.

Static vs. Dynamic Models

Static: assumes no continuous growth or inflation.

What Is Money?

Anything that serves as: Medium of exchange, Unit of account, Store of value.

Types of Money

Commodity money: has intrinsic value (gold, silver).

M1 and M2

M1: currency + checking deposits + traveler's checks.

Fractional Reserve Banking

Banks keep only a fraction of deposits as reserves, lending out the rest.

Reserve Requirement

Required Reserves = Reserve Ratio × Deposits.