Aggregate Expenditure and Equilibrium Output
Aggregate Expenditure
& Equilibrium Output.
In the short run, firms respond to planned spending and unexpected inventories. Build the Keynesian cross and discover how expenditure determines equilibrium income when prices and capacity are temporarily fixed.
Observe
Watch inventories.
Firms discover disequilibrium
after customers decide.
When planned expenditure exceeds current output, inventories fall unexpectedly. Firms respond by increasing production and employment. When expenditure falls short, unwanted inventories accumulate and firms reduce output.
Unexpected inventory change tells firms whether current production is above or below planned demand.
Think
Separate autonomous and induced spending.
Some expenditure begins independently;
some rises with income.
Consumption contains an autonomous component and an induced component governed by the marginal propensity to consume. Adding planned investment, government spending and net exports produces the aggregate-expenditure function.
Ā
Spending independent of current income: C₀ + I + G + NX.
cY
Consumption generated as current income rises.
Y = AE
Planned expenditure exactly purchases current output.
Analyse
Move the expenditure line.
Construct the
Keynesian cross.
Adjust autonomous expenditure and the marginal propensity to consume. The graph and equilibrium calculation update together.
Aggregate-expenditure laboratory
INTERACTIVE KEYNESIAN CROSS
Equilibrium output lies below potential, indicating a recessionary expenditure gap.
Apply
Interpret adjustment, not just intersection.
The crossing point represents
a behavioural process.
Below equilibrium output, planned expenditure exceeds production and inventories fall. Above equilibrium, expenditure is insufficient and inventories accumulate. These signals move firms toward Y*.
Unplanned inventory decline
Sales exceed production. Firms increase output, employment and income.
Unplanned inventory accumulation
Production exceeds sales. Firms reduce output, employment and income.
Demand-driven output
Clarifies how weak spending can leave capacity unemployed.
Useful for short-run recession analysis.
Fixed prices and capacity
Inflation, interest rates and supply constraints are temporarily held aside.
Later modules restore these mechanisms.
Decide
Diagnose inventory adjustment.
What will firms do when
planned expenditure is lower than output?
The economy produces €600bn, but households, firms, government and foreign buyers plan to purchase only €560bn.
MACROECONOMICS · MODULE 04 COMPLETE
You can now find
short-run equilibrium.
Aggregate expenditure determines output where planned spending equals production. Unexpected inventories transmit disequilibrium into changes in production, employment and income.
