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Chapter Review Chapter 30: Aggregate Expenditures and Income

  1. Income-expenditure analysis shows how the equilibrium level of output in the economy is determined when firms produce to meet demand.
  2. Equilibrium output is determined by the intersection of the 45-degree line and the aggregate expenditures schedule. The aggregate expenditures schedule shows the level of expenditures at each level of national income, while the 45-degree line represents the points where aggregate expenditures equal output.
  3. Shifts in the aggregate expenditures schedule give rise to changes in equilibrium output. The magnitude of the increase in output resulting from an upward shift in the schedule depends on the slope of the schedule. Much of macroeconomic analysis focuses on what determines the slope of the schedule, what causes shifts in the schedule, and how government policies affect the schedule.
  4. Aggregate expenditures are the sum of consumption, investment, government purchases, and net exports.
  5. Consumption increases as disposable income increases. The amount by which consumption increases when disposable income increases by a dollar is called the marginal propensity to consume.
  6. The multiplier tells us how much total aggregate expenditures and output increase when the aggregate expenditures schedule shifts up by $1. The multiplier is larger if the marginal propensity to consume is large.
  7. If tax revenues rise with income, the aggregate expen¬ ditures schedule is flattened and the multiplier is re¬ duced. Taxes act as an automatic stabilizer. Increases in government purchases shift the schedule up.
  8. Imports increase with income. The relationship between imports and income is called the import function; its slope is the marginal propensity to import. Exports are determined by factors in other countries. Trade reduces the multiplier, because as income increases, some of it goes to purchase foreign rather than domestic goods.
  9. Both imports and exports depend on the exchange rate. A fall in the value of the dollar increases exports and reduces imports; this increase in net exports shifts the aggregate expenditures schedule up.
  10. Changes in the real interest rate affect investment, the exchange rate, and net exports. A rise in the real interest rate reduces investment and net exports, leading to a downward shift in the aggregate expenditures schedule. Consequently, the level of output consistent with equilibrium falls as the real interest rate rises.
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