Friday, August 12, 2016

162. Aggregate Expenditure (AE) and the Multiplier effect

Aggregate Expenditure (AE) - defined as the total amount that firms and households plan to spend on goods and services at each level of income. Also, it can be seen that the aggregate expenditure is the sum of expenditures on consumption, investment, government expenses and net exports.

The multiplier effect - refers to the increase in final income arising from any new injection of spending. The size of the multiplier depends upon household's marginal decisions to spend, called the marginal propensity to consume (mpc), or to save, called the marginal propensity to save (mps). (Memory = 50)

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