Consumption Plus Investment Line

The axes of the expenditure output diagram. The vertical distance between ae and the 45degrees line at the level of potential real gdp.

Investment And Government Spending

Concept of consumption saving and investment economic development of a country refers to an increase in the standard of living of its people coupled with a sustained growth rate.

Consumption plus investment line. 6 3 though average propensity to consume c y declines marginal propensity to consume which equals δc δy remains constant since consumption function curve cc is a straight line and therefore its slope δc δy is constant. When businesses make decisions about whether to build a new factory or to place an order for new computer equipment their decision is forward looking based on expected rates of return and the interest rate at which they can borrow for the investment expenditure. Classical economics assumes that the economy works on a full employment equilibrium which is not always true.

The behavior of consumption and investment over time can be described as follows. D consumption plus planned investment. Plotting the aggregate expenditures curve aggregate output equal to income on 45 degree line.

Consumption spending plus planned investment spending plus government purchases plus net exports. In the consumption function depicted in fig. In an economy without a government and without international transactions aggregate expenditure at each level of income is equal to a consumption plus saving.

B planned investment plus saving. Just as a consumption function shows the relationship between real gdp or national income and consumption levels the investment function shows the relationship b etween real gdp and investment levels. Which is defined as consumption plus investment plus government spending plus net exports.

The combination of the aggregate expenditure line and the income expenditure line is the keynesian cross that is the graphical representation of the income expenditure model. Aggregate spending is either for consumption or investment consumption depends on income and autonomous forces investment is either planned i p or unplanned planned investment is autonomous. Today we are going to discuss in brief about the concepts of consumption savings and investment and also line out the relationship between these three variables.

Planned aggregate expenditure is equal to consumption spending plus planned investment spending plus government purchases plus net exports. The aggregate expenditure equals the aggregate consumption plus planned investment. A 20 trillion increase in planned investment increased the ae line from ae 1 to ae 2 however real gdp increased by 40 trillion.

The aggregate expenditure is the aggregate consumption plus the planned investment ae c i. C disposable income plus the price level. E planned investment minus saving.

The expenditure output model sometimes also called the keynesian cross diagram determines the equilibrium level of real gdp by the point where the total or aggregate expenditures in the economy are equal to the amount of output produced the axes of the keynesian cross diagram presented in show real gdp on the horizontal axis as a measure of output.

Consumption And The Aggregate Expenditures Model

Aggregate Demand