Principles of Macroeconomics / Unit 9 MAC 0822 worked example, 60 to 90 seconds
Building an AE Schedule and Finding Equilibrium
The idea
Use the course's economy. Autonomous consumption is 500, the propensity to consume is 0.75, the tax rate is 20 percent, investment is 800, government purchases are 1,000 and exports are 400, all in billions. Disposable income is 80 percent of GDP, so consumption is 500 plus 0.75 of that, which adds 0.6 of GDP. The autonomous total is 2,700 and the slope is 0.6, so expenditure equals 2,700 plus 0.6 of GDP.
In practice
At GDP of 5,000, expenditure is 5,700, which exceeds output, so production rises. At 6,000, expenditure is 6,300, still above output. At 6,750, expenditure is 6,750 and the two are equal. At 7,000, expenditure is 6,900, below output, so unsold goods accumulate and production falls. At 8,000, expenditure is 7,500, far below output. Equilibrium is 6,750, and the arrows on either side both point toward it.
Where people slip
Check the equilibrium row by substitution rather than by reading the graph. If expenditure and output differ by even a little at the row you called equilibrium, the intercept or the slope is wrong, and every later answer inherits the error.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
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