*read previous post first*

Aggregate Expenditure

The Expenditure Multiplier (k)

'k' represents the amount that you multiply an initial change affecting output, to find the total final change in output.

e.g. Assume an initial increase in Government Expenditure (G) by $10m.

ΔG lead to ΔY because (Y = Consumption (C) + Investments (I) + G + Exports net of Imports (NX))

ΔY is divided into ΔTax (T) and ΔDisposable income (YD).

ΔYD is divided into the Consumption of either domestic or imported goods (C_d, C_m)

And ΔC_d will lead to ΔY, leading all the way back to stage 1 of the flow, where it starts off again but with a smaller amount to flow through.

In other words, you have smaller and smaller increases within each cycle which are determined by your Marginal Propensity to Consume Domestic Goods (MPC_d = ε), where ε is [0, 1]. i.e. You spend between $0 - 1 of every dollar you earn on domestic goods.

And so you have:

ΔY = ΔG + ε*ΔG + (ε^2)*ΔG ... + (ε^n)ΔG

= ΔG*(1/(1-ε)) <---- [doesn't make sense to you mathematically? well then get cracking, cause it does make sense]

= ΔG*k

where k is the multiplier (1/(1-ε)).

Aggregate Expenditure (AE) Curve

AE = C + I + G + EX - IM, and it is plotted on AE versus Y, where there is no P, hence it is held constant.

NB: This assumes constant P despite changing Y, hence, it is a Keynesian model.

(Okay, this topic is hard to explain without a diagram...)

To derive the AE curve:

Plot autonomous expenditure (expenditure independant of income) as constants on the plane. i.e. horizontal lines at the appropriate levels of AE.

e.g. Government Expenditure is to be $100b for the period, hence, a horizontal line at 100 is plotted.

Add autonomous Investments in there too. So you now have a horizontal line G + I, representing total government and investments expenditure.

Add autonomous Exports in there. Exports are independant of Y because we're not the one's buying them, people overseas are. Now it is G + I + EX.

And now the most devillish component: Consumption.

C = a + bYD

where a is autonomous consumption, e.g. rent, food, electricity;

b is the marginal propensity to consume domestically;

and YD is disposable income.

It can be further broken down into C = a + bYD = a + b(Y - T0 - Yt) = a - bT0 + (b - bt)Y.

T0 is tax independant of income, t is income tax, and Y is income/output.

So the "Y-intercept" is (a - bT0) for this component, and the slope of C is (b-bt). So just chuck this onto the AE, Y plane...

(nearly done...) To get AE net of Imports (IM), you decrease the curve by IM.

IM = IM0 + mY, where m is the marginal propensity to consume imported goods, makes sense I hope.

So you should have a slightly flatter slope, and a lower Y-intercept. And that's your AE-curve.

FINAL STEP. Construct a 45 degree line to intercept with your AE-curve. Where it intercepts is your planned expenditure. Being displaced by any amount along the curve from this point of equilibrium expenditure will mean that there has been either: unplanned investments along the way, where C > YD or vice versa.

OK STUFF THAT, bad topic to try revise without a diagram.

*publish*