-Aggregate Expenditures: The sum of the total spending in the economy.
-AE = C + I + G + NX
-Slope of the aggregate expenditures line is the marginal propensity to consume (MPC).
-The curve shows for any given level of income, what we as an economy are willing to consume.
-Savings is the leakage that causes AE to be less than GDP.
Aggregate Expenditures
-The equilibrium is where spending is equal to output. In other words, we as an economy consume what we produce.
-That’s where the significance of the 45 degree line comes in. At every point on the line, Y = X, so in this case the 45 degree line shows where spending is equal to income.
Aggregate Expenditures 2
-This is a short run model, so prices are sticky (they do not change). So instead of react to changing prices, firms react to changing inventory levels.
-If aggregate expenditures is greater than income (Y1, AE1), then spending is greater than production. We are buying more than we make. Firms will have to sell off their inventory, reducing inventory. Firms will react by hiring more workers and increasing output.
-If aggregate expenditures is less than income (Y2, AE2), then spending is less than production. We are buying less than we make. Firms will have to add on to their inventory, increasing inventory. Firms will react by laying off workers and decreasing output.

Disclaimer

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