Question 1

What is autonomous expenditure in planned aggregate expenditure?

Accepted Answer

Autonomous expenditure is the minimum level of spending that occurs even when aggregate output is zero. It includes autonomous consumption and fixed planned investment that do not depend on income levels. In the example provided, autonomous expenditure equals $125, reflecting spending that happens regardless of economic output.

Question 2

How does the marginal propensity to consume affect planned aggregate expenditure?

Accepted Answer

The marginal propensity to consume determines how much of each additional dollar of income households spend. With a marginal propensity to consume of 0.75, households spend 75 cents of every extra dollar earned. This fraction directly increases planned aggregate expenditure as output and income rise throughout the economy.

Question 3

What happens when planned spending exceeds actual output?

Accepted Answer

When planned aggregate expenditure exceeds actual output, unplanned inventory decreases occur. Firms sell more than they produced, depleting stock. This signals strong demand and typically prompts firms to increase production in subsequent periods to restore inventory levels and meet spending expectations.

Question 4

How is equilibrium determined in the planned aggregate expenditure model?

Accepted Answer

Equilibrium occurs when planned aggregate expenditure equals actual output, resulting in no unplanned inventory changes. At this point, households and firms' spending plans align with production levels. The economy stabilizes at this output level until external factors shift consumption or investment plans.

Question 5

What causes inventory buildup in the planned aggregate expenditure framework?

Accepted Answer

Inventory buildup occurs when actual output exceeds planned aggregate expenditure. Firms produce more than households and businesses plan to spend, leaving unsold goods. This unplanned inventory accumulation signals weak demand and typically leads firms to reduce production until spending and output realign.

Question 6

How does the consumption function relate to planned aggregate expenditure?

Accepted Answer

The consumption function shows how consumption varies with income, expressed as C = autonomous consumption + (marginal propensity to consume × income). Planned aggregate expenditure combines this consumption function with fixed planned investment. Together, they determine total spending at each income level and reveal whether the economy moves toward equilibrium.

Question 7

Why does planned aggregate expenditure increase with aggregate output?

Accepted Answer

Planned aggregate expenditure increases with output because consumption rises as income increases. While autonomous expenditure remains constant, the income-dependent portion of consumption grows proportionally to output through the marginal propensity to consume. Fixed planned investment adds a constant amount, making total spending rise predictably with aggregate output.

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