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October 16, 2018 

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INCREASING MARGINAL RETURNS: In the short-run production of a firm, an increase in the variable input results in an increase in the marginal product of the variable input. Increasing marginal returns typically surface when the first few quantities of a variable input are added to a fixed input. Compare this with decreasing marginal returns. You should also compare this with economies of scale associated with long-run production.

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SLOPE, AGGREGATE EXPENDITURES LINE:

The positive slope of the aggregate expenditures line is the sum of the marginal propensity to consume (MPC), marginal propensity to invest (MPI), and marginal propensity for government purchases (MPG), less the marginal propensity to import (MPM). This slope is greater than zero but less than one, reflecting induced expenditures by the four macroeconomic sectors (household, business, government, and foreign). The slope of the aggregate expenditures line determines the magnitude of the multiplier process.
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--induced and autonomous--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 slope of the aggregate expenditures line presented here is positive, but less than one. Click the [Slope] button to illustrate. In fact, the slope of the aggregate expenditures line is numerically based on the marginal expenditure propensities for any of the induced expenditures included in the aggregate expenditures line. For a "complete" four-sector aggregate expenditures line, the slope is equal to the sum of the marginal propensity to consume (MPC), marginal propensity to invest (MPI), and marginal propensity for government purchases (MPG), less the marginal propensity to import (MPM). If induced taxes are also included, then the slope is adjusted for the marginal tax rate.

To illustrate the connection between slope and the marginal expenditure propensities, consider the equation for the slope of the aggregate expenditures line, specified as the "rise" over the "run." The rise is the change in aggregate expenditures measured on the vertical axis and the run is the change in income (or production) measured on the horizontal axis.

slope=rise
run
=change in aggregate expenditures
change in income
However, for any induced movement on the aggregate expenditures line, the change in aggregate expenditures includes changes in consumption expenditures, investment expenditures, government purchases, or net exports. The slope of the aggregate expenditures line can thus be specified as based on each of these expenditures.
slope=change in (consumption + investment + government purchases + net exports)
change in income
This can be rewritten as:
slope=change in
consumption
change in
income
+change in
investment
change in
income
+change in
government purchases
change in
income
+change in
net exports
change in
income
Because the induced change in net exports is attributable totally to the induced change in imports and because imports are subtracted for exports to derive net exports, the change in net exports is equal to the negative change in imports. The slope can be rewritten as:
slope=change in
consumption
change in
income
+change in
investment
change in
income
+change in
government purchases
change in
income
-change in
imports
change in
income
Each of these terms is a corresponding marginal propensity.
slope=marginal propensity
to consume
+marginal propensity
to invest
+marginal propensity
for government purchases
-marginal propensity
to import
Or, using standard abbreviations that are both symbolic and a little easier to remember.
slope=MPC+MPI+MPG-MPM
Because each of these marginals is the slope of the corresponding expenditure line (consumption line, investment line, government purchases line, and net exports line), the slope of the aggregate expenditures line is the summation of the slopes of the lines for each of the four aggregate expenditures.

The positive slope of the aggregate expenditures line reflects induced expenditures, which are aggregate expenditures that depend on the level of income or production. If the aggregate economy has more income, then the four macroeconomic sectors are induced to undertake additional expenditures. Of course, a drop in aggregate income or production induces the sectors to reduce expenditures.

<= SLOPE, AGGREGATE DEMAND CURVESLOPE, CONSUMPTION LINE =>


Recommended Citation:

SLOPE, AGGREGATE EXPENDITURES LINE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: October 16, 2018].


Check Out These Related Terms...

     | aggregate expenditures line | intercept, 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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