Topics: Macroeconomics, Economics, Keynesian economics Pages: 5 (1271 words) Published: June 1, 2013
The total expenditures on gross domestic product undertaken in a given time period by the four sectors--household, business, government, and foreign. Expenditures made by each of these sectors are commonly termed consumption expenditures, investment expenditures, government purchases, and net exports. Aggregate expenditures (AE) are a cornerstone in the study of macroeconomics, playing critical roles in Keynesian economics, aggregate market analysis, and to a lesser degree, monetarism. In particular, aggregate expenditures are combined with the price level as aggregate demand. Aggregate expenditures are the total expenditures on gross domestic product. These expenditures are used by the household, business, government, and foreign sectors to purchase all of the gross domestic product supplied by the domestic economy. These combined expenditures are a key part of the foundation of macroeconomic analysis orunemployment, inflation, business cycles, and other phenomena Aggregate expenditures are related to, but different from, aggregate demand. The difference between aggregate expenditures and aggregate demand is much like the difference between quantity demanded andmarket demand. Like quantity demanded, aggregate expenditures are expenditures at a given price level. And like market demand, aggregate demand is the whole range of expenditures at a range of price levels. The Aggregate Expenditures Equation

The following equation is commonly used to summarize the four components that make up aggregate expenditures: AE| =| C| +| I| +| G| +| (X| -| M)|
The notation used here is relatively straight forward. AE is aggregate expenditures; C is consumption expenditures by the household sector; I isinvestment expenditures on capital goods by the business sector; G isgovernment purchases; and (X - M) is net exports, with X being exports and M being imports. Business Cycles and Stabilization Policies

Aggregate expenditures play a prominent role in macroeconomic analyses and theories. They achieve this status because they are critical to the performance and stability of the macroeconomy. In particular, most business-cycle instability is directly attributable to changes in aggregate expenditures. Business-cycle contractions are invariably the result of decreases in the four expenditures. And business-cycle expansions can be largely traced to increases in the four expenditures. Because aggregate expenditures are an important source of macroeconomic instability, they are also seen as a prime target for government stabilization policies designed to correct instability problems. Fiscal and monetary policy, the two most widely use stabilization policies, both act on macroeconomic instability through aggregate expenditures.Fiscal policy works on aggregate expenditures directly through changes in government purchases and indirectly through tax-induced changes in consumption expenditures and investment expenditures. Monetary policyaffects aggregate expenditures directly by providing the four sectors with spendable money and indirectly through interest-rate-induced changes in consumption expenditures and investment expenditures. Four Expenditures

The four categories of aggregate expenditures, corresponding with the four basic macroeconomic sectors are: consumption expenditures (household sector), investment expenditures (business sector), government purchases (government sector), and net exports (foreign sector). * Consumption Expenditures: Consumption expenditures are the expenditures by the household sector on final goods and services undertaken in a given time period. Consumption expenditures are a rather large part of aggregate expenditures, about two-thirds, that are used by households to purchase commodities such as food, clothing, and kitchen appliances.

The three specific categories of consumption expenditures--nondurable goods, durable goods, and services. Nondurable goods include food,...
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