Principles of Macroeconomics / Unit 9 MAC 0818 worked example, 60 to 90 seconds
Sorting the Components
The idea
Classify each component of aggregate expenditure as autonomous or induced, then say what it does to the line. The test is one question: does this component change because real GDP changed? If not, it is autonomous and enters as a horizontal line that sets the intercept. If it does, it is induced and contributes to the slope.
In practice
Investment turns on expected returns, interest rates and technology, none of which is on the horizontal axis, so it is autonomous. Government purchases are set by political decision, so they are autonomous. Exports are set by foreign income, not domestic, so they are autonomous too. Consumption is partly induced, through the propensity to consume. Taxes rise with income, so they are induced. Imports rise with income, so they are induced and they enter negatively, because spending on foreign output is not spending on domestic output.
Where people slip
Autonomous components shift the line without tilting it; induced components change its tilt. Two entries from now that distinction decides whether the multiplier itself changes, so sorting the components is not bookkeeping.
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