What does the 45 degree line represent?

The 45-degree line shows where aggregate expenditure is equal to output. This model determines the equilibrium level of real gross domestic product at whichever point aggregate expenditures are equal to total output. In a Keynesian cross diagram, real GDP is shown on the horizontal axis.

What does it mean when the aggregate expenditure line crosses the 45 degree line in other words how would you explain the intersection in words?

The point where the aggregate expenditure line crosses the 45-degree line will be the equilibrium for the economy. It is the only point on the aggregate expenditure line where the total amount being spent on aggregate demand equals the total level of production.

What is a 45 degree line called?

The line, sometimes called the 1:1 line, has a slope of 1. When the abscissa and ordinate are on the same scale, the identity line forms a 45° angle with the abscissa, and is thus also, informally, called the 45° line.

What is the meaning of the 45 line in the 45 line diagram in the 45 line diagram the 45 line shows?

What is the meaning of the​ 45° line in the​ 45°-line diagram? In the​ 45°-line diagram, the​ 45° line shows. all the points where aggregate expenditure equals real GDP.

When the AE line lies above the 45 line?

If the AE curve lies above the 45 degree line there is a recession at full employment. The money supply changes will not be affected by the money multiplier. Aggregate demand is total goods produced in the economy.

What is meant by expenditure equilibrium?

An economy is said to be at equilibrium when aggregate expenditure is equal to the aggregate supply (production) in the economy. The economy is constantly shifting between excess supply (inventory) and excess demand.

What does the slope of the aggregate expenditure line equal?

In Figure 28.8 “Plotting the Aggregate Expenditures Curve”, the slope of the aggregate expenditures curve equals the marginal propensity to consume. This is because we have assumed that the only other expenditure, planned investment, is autonomous and that real GDP and disposable personal income are identical.

What is the key idea in the aggregate expenditure macroeconomic model?

What is the key idea in the aggregate expenditure macroeconomic​ model? in any particular​ year, the level of GDP is determined mainly by the level of aggregate expenditure.

What is the equation for aggregate expenditure quizlet?

Aggregate expenditure​ = Consumption​ + Planned investment​ + Government purchases​ + Net​ exports, ​where: Consumption​ (C): Spending by households on goods and services.

What is the slope of the expenditure line?

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).

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

First, consumption expenditure increases as income does. For every increase in income, consumption increases by the MPC times that increase in income. Thus, the slope of the consumption function is the MPC. Second, at low levels of income, consumption is greater than income.

What factors make the aggregate expenditure line steeper?

However, the slope of the aggregate expenditures line is based on all induced factors. If investment and government purchases are induced in addition to consumption, then the slope is steeper and the multiplier is bigger. If taxes and imports are also induced, then the slope is flatter and the multiplier is smaller.

What determines the slope of the planned expenditure function?

The slope of the line in Figure 16.11 “Planned Spending in the Aggregate Expenditure Model” is given by the marginal propensity to spend. For the reasons that we have just explained, we expect that this is positive: increases in income lead to increased spending.

What is the slope of both the consumption function and aggregate expenditures curve?

Explanation: In a simple Keynesian model, the slope of the Aggregate Expenditure curve is the same as marginal propensity to consume. Look at the graph. Consumption expenditure is represented by ‘C’ Its slope is the same as MPC .

How does a decrease in government spending affect the aggregate expenditure line quizlet?

0.5. 0.25. How does a decrease in government spending affect the aggregate expenditure line? A – It shifts the aggregate expenditure line upward.

What are planned aggregate expenditures?

According to the Keynesian model of macroeconomics, aggregate planned expenditure (PE) is determined as the sum of planned consumption expenditures (C), planned investment expenditures (I), planned government expenditures (G) and planned net exports (NX):

What shifts the aggregate expenditure line?

Compared to the simplified aggregate expenditures model, the aggregate expenditures curve shifts up by the amount of government purchases and net exports.An even more realistic view of the economy might assume that imports are induced, since as a country’s real GDP rises it will buy more goods and services, some of …

Why does the IS curve slope downward?

The IS curve is downward sloping. When the interest rate falls, investment demand increases, and this increase causes a multiplier effect on consumption, so national income and product rises.

How do you calculate the aggregate expenditure model?

The equation for aggregate expenditure is: AE = C + I + G + NX. Written out the equation is: aggregate expenditure equals the sum of the household consumption (C), investments (I), government spending (G), and net exports (NX).

When the aggregate expenditure line intersects the 45o line at a level of GDP below potential GDP?

In the Keynesian cross diagram, if the aggregate expenditure line intersects the 45-degree line at the level of potential GDP, then the economy is in sound shape. There is no recession, and unemployment is at the natural rate–what we call full employment.

What is expenditure model?

The expenditure-output model, sometimes also called the Keynesian cross diagram, determines the equilibrium level of real GDP by the point where the total or aggregate expenditures in the economy are equal to the amount of output produced.

What is aggregate expenditure quizlet?

Aggregate expenditure​ (AE) The total amount of spending in the​ economy: the sum of​ consumption, planned​ investment, government​ purchases, and net exports.