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A PRIORI: A presumption made before an analysis is undertaken, often based on experiences, beliefs, or deductions from seemingly self-evident propositions about how the world works. This is a Latin for assumption or axiom. A similar sounding, but opposite term is a posteriori, which is derived from observation or facts. For example, in the study of economics of crime you might assume, a priori, that people are basically "good", because that just seems to be part of human nature, and conclude, a posteriori, that people are more likely to commit crimes when the threat of capture and conviction is lower.

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INTERCEPT, AGGREGATE EXPENDITURES LINE:

The intercept of the aggregate expenditures line indicates autonomous expenditures, aggregate expenditures that do not depend on the level of income or production. This can be thought of as aggregate expenditures that the four macroeconomic sectors (household, business, government, and foreign) undertake regardless of the state of the economy. Autonomous expenditures are affected by the aggregate expenditures determinants, which cause a change in the intercept and a shift of the aggregate expenditures line.
Aggregate Expenditures Line
Aggregate Expenditures Line
The aggregate expenditures line, which embodies the key Keynesian principle of effective demand, shows the relation between aggregate expenditures and the actual level of aggregate income or production in the domestic economy. The income and production measures commonly used are national income and gross domestic product.

The two basic types of expenditures--autonomous and induced--are indicated by the aggregate expenditures line.

A representative aggregate expenditures line is presented in the exhibit to the right. This red line, labeled AE in the exhibit, is positively sloped, indicating that greater levels of income generate greater aggregate expenditures by the four sector. This positive relation is primarily based on the Keynesian psychological law indicating that consumption expenditures are induced by household income. However, this positive slope is reinforced and augmented by induce investment, government purchases, and net exports.

The intercept of the aggregate expenditures line indicates the intersection point between the aggregate expenditures line and the vertical expenditures axis. The aggregate expenditures line intersects the vertical axis in this exhibit at a value of $5 trillion. Theoretically, this is a minimum "baseline" level of aggregate expenditures, the amount of investment undertaken if income and production fall to zero. This intersection indicates autonomous expenditures--aggregate expenditures unrelated to income. Click the [Intercept] button to illustrate.

Autonomous expenditures are aggregate expenditures by the household, business, government, and foreign sectors that are unrelated to and unaffected by the level of income or production. This is best indicated by a zero level of income. While individuals, business firms, government agencies, or foreign entities might occasionally come face-to-face with autonomous expenditures, as their own slice of aggregate income drops to zero, for the aggregate economy autonomous expenditures is mostly an unlikely theoretical extrapolation.

However, from an analytical perspective, the intercept of the aggregate expenditures line is affected by the aggregate expenditures determinants. These are ceteris paribus factors other than income and production that affect aggregate expenditures, but which are held constant when the aggregate expenditures line is constructed. A few of the more important determinants are interest rates, expectations, fiscal policy, and wealth. Any change in these determinants cause the aggregate expenditures line to shift, which necessarily means a new intercept and a new level of autonomous expenditures.

<= INSURANCEINTERCEPT, CONSUMPTION LINE =>


Recommended Citation:

INTERCEPT, AGGREGATE EXPENDITURES LINE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2020. [Accessed: January 29, 2020].


Check Out These Related Terms...

     | aggregate expenditures line | slope, aggregate expenditures line | two-sector aggregate expenditures line | three-sector aggregate expenditures line | four-sector aggregate expenditures line | derivation, aggregate expenditures line | aggregate expenditures determinants | induced expenditures | autonomous expenditures |


Or For A Little Background...

     | consumption expenditures | investment expenditures | government purchases | net exports | aggregate expenditures | Keynesian economics | macroeconomics | household sector | business sector | government sector | foreign sector | national income | gross domestic product | effective demand | psychological law |


And For Further Study...

     | Keynesian model | two-sector Keynesian model | three-sector Keynesian model | four-sector Keynesian model | Keynesian equilibrium | injections-leakages model | aggregate demand | paradox of thrift | fiscal policy | multiplier |


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