.5 is the Marginal Propensity to Expend (mpe). it tells us that for every additional dollar of income we spend .5 on goods and services from our business.
to see how the AE affects the equilibrium plot the AE function on a graph. then draw a 45 degree line. where the AE and 45 degree line cross is the equilibrium. When the AE shifts up or down, were the new line crosses the 45 degree line is the new equilibrium ( AE up ; EQ up, AE down, EQ down).The economy is in equilibrium when AE =Y
To change the Aggregate expenditures( what causes AE to shift) Change in each one of C,G,I, or X-IM will cause AE to shift
an increase in C,I,G,X-IM will cause the AE to shift up, where as a decrease in these will cause the AE to shift down.
C increases- increase wealth, prices go down, age of durable goods increases, people are optimistic about the future.
I increases- interest rate decreases, price of capital goods decrease, age of capital goods increase, space capacity decreases, optimistic about the future, red tape decreases
G increases- simulate the economy with fiscal policy
x-im increases- price of goods in foreign countries increase, domestic prices decrease, foreign income increases, Canadian dollar depreciates and people like Canadian products more.
Dr. Stephanie Powers, "Aggregate Demand", Intro to Macroeconomics.(Lecture, Donald School of Business, Red Deer Alberta, Winter 2012)
Aggregate expenditure = C+I+G+(x-IM)
C=5+0.6Y
I=75
G=160
x-im=60-.1Y
AE= 300+.5Y
.5 is the Marginal Propensity to Expend (mpe). it tells us that for every additional dollar of income we spend .5 on goods and services from our business.
to see how the AE affects the equilibrium plot the AE function on a graph. then draw a 45 degree line. where the AE and 45 degree line cross is the equilibrium. When the AE shifts up or down, were the new line crosses the 45 degree line is the new equilibrium ( AE up ; EQ up, AE down, EQ down).The economy is in equilibrium when AE =Y
To change the Aggregate expenditures( what causes AE to shift) Change in each one of C,G,I, or X-IM will cause AE to shift
an increase in C,I,G,X-IM will cause the AE to shift up, where as a decrease in these will cause the AE to shift down.
Dr. Stephanie Powers, "Aggregate Demand", Intro to Macroeconomics.(Lecture, Donald School of Business, Red Deer Alberta, Winter 2012)