Main Concept

According to the Keynesian model of macroeconomics, aggregate planned expenditure (PE) is determined as the sum of planned consumption expenditures (C), planned investment expenditures (I), planned government expenditures (G) and planned net exports (NX):

  $\mathrm{PE} \= C \+ I \+ G \+\mathrm{NX}$ 

In this model, consumption expenditure is an endogenous variable, meaning that it varies with the level of disposable income, which can be defined as total output (real GDP) less aggregate taxes or $Y-T$. The degree to which consumption changes in response to a change in disposable income depends on the marginal propensity to consume (MPC). So, we can represent planned consumption expenditure as the following function: $C\=\mathrm{CA}\+\mathrm{MPC}\left(Y-T\right)$ where CA represents the autonomous component of consumption (the portion of total consumption expenditure that would still occur if disposable income was $0).

Investment expenditure, government expenditure, and net exports are all set to be exogenous variables in this model, meaning that they do not vary with the current level of real GDP and so must be determined by external forces such as government policy and foreign exchange. In more advanced macroeconomics models, net exports is also be considered to be an endogenous variable and so changes the slope of the graph by adjusting the marginal propensity to spend.

In the diagram below:

The solid line depicts the planned expenditure function, as represented by $\mathrm{PE}\=\mathrm{CA}\+\mathrm{MPC}\left(Y-T\right)\+\mathrm{I}\+G\+\mathrm{NX}$.

The dashed line depicts the line along which real GDP equals aggregate planned expenditure, or more simply Y = PE.

The intersection of these two lines is known as Keynesian equilibrium.

Components of Aggregate Planned Expenditure

Autonomous Component of Consumption (CA)

Marginal Propensity to Consume (MPC)

Investment Spending (I)

Government Spending (G)

Net Exports (NX)

Aggregate Taxes (T)

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