Alright. Now let's take what we've learned about the aggregate expenditures model and put it on the graph. So what we're going to do now is find our macro numerical approach. The aggregate expenditures model, as we discussed, describes the relationship between spending in the economy, which is our aggregate expenditures, and our production, which is our GDP, real GDP. So, AE equals our spending and GDP equals our production, right? We're trying to find that balance where spending equals production, defining our spending. Aggregate expenditures include consumption plus investment spending, plus government purchases, plus net exports, as we originally defined GDP based on what was being spent in the economy, what was being consumed, invested, government purchases, net exports. So, we're going to find that level of GDP that equals our aggregate expenditures.
When we define these terms, we said consumption would have some base number. Even with no income, there's still going to be some consumption like food purchase and shelter. We'll denote this constant amount as
Let's graph our consumption line. Our base amount of consumption is 2 (could be 2,000,000,000), and for every extra dollar that is earned, half of it is spent, and half is saved, giving us a marginal propensity to consume of 0.5. We've got these constant levels of investment, government purchases, and net exports—firm spending of 1,000,000,000, government purchases of half a 1,000,000,000, and net exports of half a 1,000,000,000 as well.
On the graph, in the aggregate expenditures model, we'll have our expenditures, our spending on the y-axis and our GDP on the x-axis. We're looking for a place where these are equal, and I've drawn a line here across the middle called our 45-degree line. This line is a very important part of this graph because all the points along this line indicate macroeconomic equilibrium.
When graphing just consumption, we have
Our final aggregate expenditures equation is
Now that we've got our macroeconomic equilibrium on the graph, we can move to the next part of our discussion.