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ELASTICITY ALTERNATIVES, SUPPLY: The price elasticity of supply can fall into one of five categories--perfectly elastic, relatively elastic, unit elastic, relatively inelastic, and perfectly inelastic--based on the coefficient of elasticity. This table summarizes the five alternatives. These five elasticity alternatives form a continuum ranging from perfectly elastic at one end to perfectly inelastic at the other. The "middle" of this continuum is occupied by unit elastic. in that the "unit" and the two "perfectly" are really borders, boundaries, and endpoints, most of the real world action involving the price elasticity of supply takes place in the two "relatively" alternatives--relatively elastic and relatively inelastic.
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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 | 
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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. - Induced expenditures are the slope of the aggregate expenditures line. The marginal propensity to consume (MPC), which is the slope of the consumption line, forms the foundation of the slope of the aggregate expenditures line. This slope, however, is augmented by the marginal propensity to invest (MPI), marginal propensity for government purchases (MPG), and marginal propensity to import (MPM).
- Autonomous expenditures are the vertical intercept, or Y-intercept, of the aggregate expenditures line. This is the sum of autonomous consumption, autonomous investment, autonomous government purchases, and autonomous net exports, with an adjustment for autonomous taxes.
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.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.
Recommended Citation:SLOPE, AGGREGATE EXPENDITURES LINE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2022. [Accessed: October 1, 2022].
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Okun's Law posits that the unemployment rate increases by 1% for every 2% gap between real GDP and full-employment real GDP.
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"The truth is not for all men, but only for those who seek it. " -- Ayn Rand, writer
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ACV
Actual Cash Value
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