What are the different components of aggregate expenditure and how do they together form the aggregate expenditure line?
The components of aggregate expenditure are consumption, investment spending, government spending, and the trade balance. The equation for aggregate expenditure is given by:
Aggregate Expenditure (AE) = Consumption (C) + Investment (I) + Government expenditure (G) + Exports – Imports (EX ? IM)
The aggregate expenditure line is formed conceptually by stacking the consumption function (with taxes included), the investment spending function, the government spending function, and the net exports function on top of each other. The point at which the aggregate expenditure line intersects the vertical axis will be determined by the levels of base consumption, investment spending, government spending, and net export expenditures—which do not vary with national income. The upward slope of the aggregate expenditure line will be determined by the tax rate as well as the marginal propensity to consume. A lower marginal propensity to consume (a higher marginal propensity to save) and a higher tax rate will make the slope of the aggregate expenditure line flatter—this is because more of any extra income will be put towards saving or taxes and less will be spent on domestic goods and services.
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