Autonomous and Induced Aggregate Expenditures

Economists distinguish two types of expenditures. Expenditures that do not vary with the level of real GDP are called autonomous aggregate expenditures. In our example, we assume that planned investment expenditures are autonomous. Expenditures that vary with real GDP are called induced aggregate expenditures. Consumption spending that rises with real GDP is an example of an induced aggregate expenditure. Figure Autonomous and Induced Aggregate Expenditures illustrates the difference between autonomous and induced aggregate expenditures. With real GDP on the horizontal axis and aggregate expenditures on the vertical axis, autonomous aggregate expenditures are shown as a horizontal line in Panel (a). A curve showing induced aggregate expenditures has a slope greater than zero; the value of an induced aggregate expenditure changes with changes in real GDP. Panel (b) shows induced aggregate expenditures that are positively related to real GDP.

Figure Autonomous and Induced Aggregate Expenditures

Autonomous and Induced Consumption

The concept of the MPC suggests that consumption contains induced aggregate expenditures; an increase in real GDP raises consumption. But consumption contains an autonomous component as well. The level of consumption at the intersection of the consumption function and the vertical axis is regarded as autonomous consumption; this level of spending would occur regardless of the level of real GDP.

Consider the consumption function we used in deriving the schedule and curve illustrated in Figure Plotting a Consumption Function:

C = $300 billion + 0.8 Y

We can omit the subscript on disposable personal income because of the simplifications we have made in this section, and the symbol Y can be thought of as representing both disposable personal income and GDP. Because we assume that the price level in the AE model is constant, GDP equals real GDP. At every level of real GDP, consumption includes $300 billion in autonomous aggregate expenditures. It will also contain expenditures “induced” by the level of real GDP. At a level of real GDP of $2,000 billion, for example, consumption equals $1,900 billion: $300 billion in autonomous aggregate expenditures and $1,600 billion in consumption induced by the $2,000 billion level of real GDP.

Figure Autonomous and Induced Consumption

Figure Autonomous and Induced Consumption illustrates these two components of consumption. Autonomous consumption, C a, which is always $300 billion, is shown in Panel (a); its equation is C a = $300 billion

Induced consumption C i is shown in Panel (b); its equation is C i = 0.8 Y

The consumption function is given by the sum of the equations; it is shown in Panel (c) of Figure Autonomous and Induced Consumption. It is the same as the equation C = $300 billion + 0.8 Yd, since in this simple example, Y and Yd are the same.