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Chapter 23: Problem 3

What does the slope of the aggregate expenditure line equal? How is the slope of the aggregate expenditure line related to the slope of the consumption function?

Short Answer

Expert verified
The slope of the aggregate expenditure line equals the marginal propensity to consume (MPC). It is the same as the slope of the consumption function because the change in income has the same effect on consumption in both cases.

Step by step solution

01

Define the Slope of the Aggregate Expenditure Line

The aggregate expenditure line plots aggregate expenditure for each level of national income or real GDP. The slope of the aggregate expenditure line equals the marginal propensity to consume (MPC), which is the amount of additional consumption that occurs with each additional unit of income.
02

Define the Slope of the Consumption Function

The consumption function plots total consumption at each level of disposable income. The slope of the consumption function also equals the marginal propensity to consume (MPC).
03

Connect the Slopes of the Aggregate Expenditure Line and Consumption Function

The slope of the aggregate expenditure line and consumption function are the same because they both equal the marginal propensity to consume (MPC). This commonality arises because a change in income has the same effect on consumption in both cases.

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Most popular questions from this chapter

(Related to the Apply the Concept on page 789) In an opinion column in the Wall Street Journal, Purdue University President Mitchell Daniels wrote that "today's 20 - and 30-year-olds are delaying marriage and delaying childbearing, both unhelpful trends from an economic and social standpoint." Why might young people be delaying marriage and childbearing? Why would this trend be unhelpful from an economic point of view? Is the trend possibly connected with the slow recovery from the \(2007-2009\) recession? Briefly explain.

(Related to Solved Problem 23.4 on page 807 ) Use the information in the following table to answer the questions. Assume that the values represent billions of 2009 dollars. $$ \begin{array}{r|r|r|r|r} \hline \begin{array}{c} \text { Real } \\ \text { GDP } \\ (Y) \end{array} & \begin{array}{c} \text { Planned } \\ \text { Consumption } \end{array} & \begin{array}{c} \text { Investment } \\ \text { (C) } \end{array} & \begin{array}{c} \text { Government } \\ \text { Purchases } \end{array} & \begin{array}{c} \text { Net } \\ \text { Exports } \end{array} \\ \hline \$ 8,000 & \$ 7,300 & \$ 1,000 & (G) & (N X) \\ \hline 9,000 & 7,900 & 1,000 & 1,000 & -\$ 500 \\ \hline 10,000 & 8,500 & 1,000 & 1,000 & -500 \\ \hline 11,000 & 9,100 & 1,000 & 1,000 & -500 \\ \hline 12,000 & 9,700 & 1,000 & 1,000 & -500 \\ \hline \end{array} $$ a. What is the equilibrium level of real GDP? b. What is the MPC? c. Suppose net exports increase by \(\$ 400\) billion. What will be the new equilibrium level of real GDP? Use the multiplier formula to determine your answer.

What are inventories? What usually happens to inventories at the beginning of a recession? At the beginning of an expansion?

Explain the difference between aggregate expenditure and aggregate demand.

What are the three main determinants of net exports? How would an increase in the growth rate of GDP in the BRIC nations (Brazil, Russia, India, and China) affect U.S. net exports?
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