3.14: Planned Aggregate Expenditure I

Planned aggregate expenditure, or AEₚ, is the total amount households and businesses plan to spend in an economy during a given time. It includes two parts: what consumers spend on everyday goods and services, and what businesses plan to invest in things like new equipment or bigger workspaces. This is written as AEₚ = C + Iₚ.

The economy is in equilibrium when the income earned, shown as Y, matches what people and businesses plan to spend. This balance is expressed as Y = AEₚ = C + Iₚ. When spending and income are equal, businesses sell just enough goods to match their produce, and production stays steady.

When actual income and planned spending do not match, businesses end up with unexpected inventory changes. If Y is greater than C + Iₚ, businesses are left with extra goods because people buy less than what is produced. For example, a toy store might find shelves filled with unsold board games. On the other hand, if C + Iₚ is greater than Y, businesses might run out of products quickly, like a local coffee shop selling all its pastries by noon.

These inventory changes guide businesses. Extra goods—tell them to slow down production, and empty shelves tell them to produce more. Over time, these decisions help bring the economy back into balance, where output fits the level of spending. Understanding these simple signals makes it easier to see how spending, production, and income work together to keep the economy running smoothly.

Planned aggregate expenditure, or AEₚ, where the p stands for planned, is the total amount that households and businesses plan to spend in an economy during a given period.

It includes two main components: consumer spending, which is what people spend on goods and services like food, clothes, and entertainment; and planned investment where the p stands for planned, which is what businesses plan to invest, such as buying machines, equipment, or building new stores. This is expressed as AEₚ = C + Iₚ.

The economy is in equilibrium when actual output, or income, denoted by Y, is equal to planned spending. So the formula is Y = AEₚ = C + Iₚ.

When output does not equal AEₚ, the economy experiences unplanned inventory changes.

If output exceeds AEₚ, that is Y > C + Iₚ, firms end up with unsold goods—an unplanned inventory buildup.

If AEₚ exceeds output, that is C + Iₚ > Y, firms sell more than anticipated, leading to an unplanned drawdown in inventories.

These adjustments in inventories signal firms to either increase or decrease production, pushing the economy back toward equilibrium.