Planned Aggregate Expenditure II

Let’s examine the planned aggregate expenditure schedule in a simplified closed economy with only consumption and planned investment.

In this example, consumption is given by C=100+0.75 with autonomous consumption of 100, a marginal propensity to consume of 0.75, which is the fraction of each extra dollar of income that is spent, and fixed planned investment of twenty-five dollars.

Let’s examine the aggregate expenditure schedule, when aggregate output is zero, spending still begins at one hundred twenty-five dollars—this is called autonomous expenditure. It reflects the minimum level of spending that occurs even without output.

Further, at four hundred dollars of aggregate output, AE is four hundred twenty-five. Planned spending exceeds actual output, causing an unplanned inventory decrease of twenty-five dollars.

At five hundred dollars of aggregate output, equilibrium occurs with no change in the inventory.

At six hundred dollars, AE is five seventy-five. Actual output exceeds planned spending, leading to an inventory buildup of twenty-five dollars.

The schedule shows how spending varies with aggregate output and reveals equilibrium.