Respond to each classmate 100 words or more.
This is the question they had to answer.
- Define aggregate demand and expenditures in your own words.
- How are aggregate demand and aggregate expenditures related?
Aggregate demand (AD) is the summation of demand for all finished goods and services along all price points. Aggregate expenditure (AE) is the summation of all spending levels for the aforementioned goods and services. AE combines the spending of the consumption function ( C ), investments ( I ), government spending ( G ), and net exports (X – M). Equilibrium is said to have been reached when “the total value of goods and services produced [real GDP (Y)] is precisely equal to the total spending for these goods and services [aggregate expenditures (AE)]” (Tucker, 2019, p. 509).
Aggregate demand and aggregate expenditure appear to be related. We find that as income increases (or decreases), our marginal propensity to consume increases (or decreases), and thus the consumption function increases (or decreases). The consumption function is one of the primary elements in calculating the aggregate expenditure. Its increase or decrease has a direct effect on spending levels for goods and services. When AE is below equilibrium, it is in a state of inventory depletion, in which businesses must hire more workers to increase capacity and output. Above equilibrium, there is an excess of inventory accumulated, which causes businesses to slow production and possibly reduce labor. Tucker notes that “any initial change in spending by the government, households, firms, or foreigners creates a chain reaction of further spending, which causes a greater cumulative change in aggregate expenditures and real GDP” (p. 515).
Both aggregate demand and expenditure play a key role in measuring economic strength and outlook for a country. There are some key differences between the two but also some synergies. I would define aggregate demand as the sum or total spending of all goods and services in a period of time at a given price. This consists of all consumer goods, capital goods (factories and equipment), exports, imports, and government spending programs. The variables are all considered equal as long as they trade at the same market value. Aggregate demand may also be defined as a schedule or curve that shows the total quantity of goods and services demanded at different price levels. I would define aggregate expenditure as the sum of all expenditures made in an economy on consumption, gross investment, government purchases and net exports. It’s important to note that this represents the current value. Some other key takeaways for aggregate expenditure include:
- The aggregate expenditure is one of the methods that is used to calculate the total sum of all the economic activities in an economy, also known as the gross domestic product ( GDP ).
- When there is excess supply over the expenditure, there is a reduction in either the prices or the quantity of the output which reduces the total output (GDP) of the economy.
- When there is an excess of expenditure over supply, there is excess demand which leads to an increase in prices or output (higher GDP).
Now for the relationship between aggregate demand and expenditure, the change in aggregate output demanded depends on how much the aggregate expenditure line shifts, not on which spending component causes the shift. Aggregate expenditure line is relationship tracing, for a given price level, spending at each level of income, or real GDP; the total of C + I + G + (X-M) at each level of income, or real GDP