Chapter 19 Macroeconomics

Aggregate expenditures function (AE)

The function that represents total spending in an economy at a given level of real disposable income.

Aggregate expenditures model

The model that determines the equilibrium level of real GDP by the intersection of the aggregate expenditures and aggregate output (and income) curves.

Spending multiplier (SM)

The ratio of the change in aggregate demand (total spending) resulting from an initial change in any component of aggregate expenditures or aggregate demand, including consumption, investment, government spending, and net exports. As a formula, the spending multiplier equals 1/(1 − MPC) or 1/MPS.

Inflationary gap

The amount by which aggregate expenditures exceed the amount required to achieve full-employment equilibrium.

Recessionary gap

The amount by which aggregate expenditures fall short of the amount required to achieve full-employment equilibrium.

Tax multiplier

The change in aggregate demand (total spending or total expenditures) resulting from an initial change in taxes. As a formula, the tax multiplier equals 1 − spending multiplier.