This is one of two classifications of aggregate expenditures. The other is autonomous expenditures, aggregate expenditures that are unaffected by the level income or production. In other words, aggregate expenditures can be divided into: (1) a minimum or baseline amount of expenditures which, in theory, would be undertaken even if the economy had no income and (2) additional expenditures that result from the income available to the economy.

While a number of factors affect aggregate expenditures, income generated by production, is arguably the most important. The induced influence of income on aggregate expenditures primarily results from induced consumption-income relation, which reflects the fundamental psychological law and is measured by the marginal propensity to consume. While induced consumption are the foundation of induced expenditures, the other three expenditures also enter the picture. Investment expenditures, government purchases, and net exports are all induced by induced by income.

Autonomous and induced expenditures interact in a specific way when equilibrium is disrupted by the aggregate expenditures determinants. A change in the determinants causes a change in autonomous expenditures, which is reflected by a shift in the aggregate expenditures line. This change disrupts the existing equilibrium. Equilibrium is then restored by a change in induced expenditures, which is indicated as a movement along the aggregate expenditures line.

Four Expenditures

• Consumption Expenditures: These are expenditures by the household sector on everything from apple juice to zirconium earrings. The vast majority of consumption expenditures are based on household sector income. This induced consumption-income relation reflects the fundamental psychological law proposed by John Maynard Keynes as an essential difference between his theory and classical economics. Induced consumption is measured by the marginal propensity to consume and the slope of the consumption line and is THE most important induced expenditure in the macroeconomy.


• Investment Expenditures: These are expenditures by the business sector on productive capital goods. While most investment expenditures are autonomous (based on such things as interest rates, technological innovations, and expectations), a modest amount of investment expenditures are induced by income. An increase in gross domestic product (and thus national income) tends to increase profits, which are then used by the business sector for capital investment expenditures.


• Government Purchases: These are expenditures by the government sector on the vast array of goods and services that it uses to perform its designated duties. Like investment, most government purchases are autonomous, but a modest amount are induced by income, especially those undertaken by state and local governments. State and local governments, which account of about two-thirds of total government purchases, are often constrained to match expenditures with taxes. If the economy is more prosperous (greater production and income), then state and local taxes rise and these government entities increase their purchases.


• Net Exports: These are the difference between exports and imports and are the net expenditures on domestic production by the foreign sector. While exports, domestic production sold to the foreign sector, is largely independent of income, imports, foreign production purchased by the domestic economic, has a significant induced component. Because imports are part of the consumption, investment, and government purchases of the household, business, and government sectors, they too are induced. However, because imports subtract from net exports, income has a negative inducement on net exports.

Induced Through An Equation

AE

=

e

+

fY

The two key parameters that characterize the aggregate expenditures equation are slope and intercept. Induced expenditures are indicated by the slope of the aggregate expenditures equation. Autonomous expenditures are indicated by the intercept.

• An Induced Slope: The slope of the aggregate expenditures equation (f) measures the change in aggregate expenditures resulting from a change in income. If income changes by $1, then aggregate expenditures change by $f. This slope is generally assumed and empirically documented to be greater than zero, but less than one (0 < f < 1). It is conceptually identified as induced expenditures. It is the combination of the induce expenditures by the household, business, government, and foreign sectors.


• An Autonomous Intercept: The intercept of the aggregate expenditures equation (e) measures the amount of aggregate expenditures undertaken if income is zero. If income is zero, then aggregate expenditures are $e. The intercept is generally assumed and empirically documented to be positive (0 < e). It is conceptually identified as autonomous expenditures. It contains the sum of autonomous consumption, investment, government purchases, and net exports.

Induced Through A Line

Aggregate Expenditures Line

The two primary characteristics of the aggregate expenditures line are, once again, slope and intercept. Slope indicates induced expenditures and intercept indicates autonomous expenditures.

• An Induced Slope: The slope of the aggregate expenditures line presented here is positive, but less than one. In this case the slope is equal to 0.75. Click the [Induced] button to highlight. And once again this is induced expenditures.


• An Autonomous Intercept: The aggregate expenditures line intersects the vertical axis at a positive value of $1 trillion. Click the [Autonomous] button to highlight. Once again this intercept value is autonomous consumption.

A Bunch Of Marginals

• Marginal Propensity to Consume: This is the change in consumption resulting from a change in income. Abbreviated MPC, this indicates the proportion of additional household income that is used for consumption. It quantifies the fundamental psychological law and is the most important of these four marginal measures. The MPC is the slope of the consumption line, is key to the slope of the aggregate expenditures line, and affects the magnitude of the multiplier.


• Marginal Propensity to Invest: Consumption is not the only one of the aggregate expenditures induced by income and with a corresponding marginal. The marginal propensity to invest (MPI) is the change in investment induced by a change in income. The induced change in investment is not nearly as big as consumption, but it does affect the slope of the aggregate expenditures line and the size of the multiplier.


• Marginal Propensity for Government Purchases: Government purchases, like investment, is also induced by income and has a corresponding marginal. The marginal propensity for government purchases (MPG) is the change in government purchases induced by a change in income. The induced change in government purchases is related to the induced change in tax collections, and while it also small compared to consumption, but it too affects the slope of the aggregate expenditures line and the size of the multiplier.


• Marginal Propensity to Import: The last of the four aggregate expenditures, net exports (exports minus imports), also has a corresponding marginal. However, the marginal is not for net exports proper, but for the imports part. The marginal propensity to import (MPM) is the change in imports induced by a change in income. The induced change in imports is closely connected to the marginal propensity to consume. That is, a portion of consumption expenditures is actually used to purchase imports, which is reflected the marginal propensity to import.