Analysis of Aggregate Expenditure and Its Economic Determinants

This assignment provides a comprehensive analysis of aggregate expenditure (AE) and its key determinants, including household consumption, investment, government spending, and net exports. It delves into how changes in these components affect the level of income, employment, and economic growth within the Australian economy. The essay explains the factors influencing each component of AE, such as consumer confidence, interest rates, exchange rates, and government policies. It also illustrates how shifts in the AE line, as proposed by Keynesian economics, can lead to expansions or contractions in the business cycle. The assignment further examines the effects of increased or decreased spending in each sector on the overall economic performance of Australia, including the impact on employment levels and economic growth. The analysis also references the role of fiscal and monetary policies in managing AE and stabilizing the economy.

Aggregate Expenditure 1
AGGREGATE EXPENDITURE
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Aggregate Expenditure 2
What are the main determinants of Aggregate Expenditure?
The main four determinants/components of the Aggregate Expenditure include household
consumption, investment, government spending and net exports.
Household Consumption is the total amount of money that people sped on commodities
over the period of the year. Household consumption include things like purchase of ball point
pens, toilet paper and couches. Generally consumption is the expenditure on consumer durable as
well as non-durable final goods. The determinants of Australian household consumption include
consumer confidence, level of disposal income, and level of discretionary income (income-tax +
interest), stock of personal wealth, fiscal policy and low inflationary expectations.
Investment is the amount of money individual and business invest on capital spending.
Investment include things like novel manufacturing machines, improvements in real estate as
well as purchases of buildings. The investment is the expenditure on capital goods by the private
and individuals firms including changes in the planned inventories. The determinants of
investment in Australia include business confidence, technological advancement, monetary
policy, government policy, profit levels, fiscal policy, and urbanization or industrialization
increases, demand for raw materials, requiring enormous capital expansion to meet demand.
Government expenditure: The total amount of money which the Australian government
is spending on both capital goods and current goods. Australian government spending will
determine the growth, employment and income. The determinants of Australian government
expenditure include government policy objectives as well as macroeconomic stability or the GFC
stimulus package.
Net exports: The net exports net export is determined by subtracting total Australian
import from total exports of Australia. It includes the Australian net external demand minus

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foreign expenditure on the Australia goods less spending on imports. This is the solely
component that is able to be a negative number. The net export will be negative if the imports is
greater than exports. Factors affecting net export in Australia include domestic and foreign
activity, tariffs, exchange rates as well as terms of trade.
Thus the AE is given by the formula:
AE=Aggregate Expenditure
C=Household consumption
I= Investment
G= Government spending
X= Net exports
The formula for AE is given by the basic addition problem:
AE=C+I+G+X
Alterations in such determinants subsequently trigger shifts of the AE line. The principle
of the effective demand that Keynes proposed as the significant theoretical variation between
Keynesian economics and the classical economic signals that the AE are mainly anchored on the
prevailing income and production levels. Where individuals have increased income, then they
remained inclined to spending more. Less income leads to the less expenditure.
How do changes in these components affect the level of income, employment and growth in
Australia?
The determinants of the AE affect the AE line much like any determinants affecting the
respective curvature-they trigger the curvature to shift. This can be illustrated by the diagram
below presenting the AE line, labelled AE. The AE determinants can cause either a surge or a
plunge in the AE.

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Increase in AE:
A surge in the AE is depicted by the upward shift of the AE line. At every level of
income and production, one or more of 4 sectors have greater AE.
Decrease in AE:
A decline in AE is demonstrated by the downward shift of AE lin. At every level of
production and income, one or more of 4 sectors have less AE.
The shifts of the AE line take front stage in the Keynesian economics. They are source of
the instability in the business cycle. A shift in the AE line disrupts the equality between the
aggregate production and AE. An upward shift will correspond with the expansion of the
business cycle whereas a downward one corresponds with the contraction of the business cycle.
The increase in household consumption in an Australian economy means an increase in
the demand of goods and services. With increased demand of goods, more production will be
required and hence increasing the employment and hence the income will increase as wages
increase which then leads to growth in the economy of Australia. On the other hand, a decrease
in the household consumption means a decrease in demand for goods and services. With

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decreased demand for goods, some business will retrench workers hence leading to
unemployment and hence reduced income which then contracts the growth of economy in
Australia.
Increased investment is caused by lower rates of interest which leads to higher
employment and income leading to higher growth of economy of Australia thus the AE line to
shift upwards. This means an increase in the number of jobs being created and hence increasing
income as more labors are employed boosting employment. With increased employment, the
economy of Australia will expand leading to increased growth. However, a decrease in
investment caused by an increase in interest rates will contract the economy as many people will
be laid off hence leading to reduced growth. This is because higher rates of interest surge cost of
borrowing utilized in financing certain kinds of consumption alongside investment expenditure
in Australia. Where the borrowing cost surges, the business and household sectors are less
probably to effect the resulting spending on consumer durable goods alongside capital goods.
Thus, the AE plunges and AE line shifts downwards.
An increase in net export will lead to increased income, unemployment and growth. An
increase in export is caused by a higher exchange rates: in Australia. For example, where price of
Australian goods increases from $0.1 a good to $0.11 a good, then Australian imports into the
US become expensive and the United States exports to Australia becomes less expensive. Thus,
imports into Australia drops and export of Australian goods into the US rises, increasing the net
export and triggering AE line to shift upwards in Australia. Increased exports from Australia
means that much goods will have to be produced and exported abroad and hence more labors
will be employed leading to increased income, and high economic growth in the Australia and
the reverse holds.

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An increased in government expenditure means an increased in government consumption
of goods leading to an expansion of the economy. On the other hand, a contraction in
government expenditure leads to a contraction in the economy. The government can use both
fiscal and monetary policy to increase expenditure. For example, when the Australian
government uses favorable fiscal policy which is the desire to counter instability in business-
cycle at federal level via fiscal policy, there will be an increased growth, income and
employment. The government is inclined to surge the autonomous government purchases to
counter the contracting business-cycle thereby triggering an increased employment, income and
growth as the AE line shifts upwards. Expanding business-cycle alternatively to the extent of
provoking inflation makes the government to reduce autonomous government purchases thereby
triggering a descending shift of the AE line.

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References
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