Economics Micro & Macro (CliffsAP)

Part II: Macroeconomics

Figure 4-1

In Chapter 3, we examined the four parts of the GDP expenditures approach (C+I+G+X), which are personal consump-
tion, gross investment, government, and net exports. On an aggregate expenditures graph, each curve represents the
expenditures of these four factors.

In Figure 4-1, you’ll notice that as each group is added to the expenditures graph, the expenditures curve shifts upward,
denoting an increase in consumption for the economy. With each increase in consumption for the economy, our equilib-
rium GDP (EQ) shifts from EQ 1 to EQ 2, and eventually, with the addition of the government, to EQ 3. This, of course,
is a simplified closed economy where the foreign sector is not considered.

Mini-Review

1. What happens to consumption when investment is added to it?
   A. It decreases as GDP increases.
   B. It increases and GDP increases.
   C. It remains constant.
   D. Investment decreases GDP.
   E. Consumption decreases GDP.


2. What does the 45-degree line on the aggregate expenditures graph represent?
   A. Consumption by firms.
   B. Consumption by households.
   C. A point of equality between expenditures and GDP.
   D. A point of equality between employment and taxes.


3. Why does the curve on the aggregate expenditures graph show different equilibrium points?
   A. As each level of consumption rises, a new equilibrium is created.
   B. As the government spends less money, the equilibrium rises.
   C. The equilibrium changes because of inflation.
   D. The equilibrium changes because of unemployment.
   E. None of the above.

Aggregate Expenditures

C

C+I

C+I+G

Real GDP

Eq^1

45 °

Eq^2 Eq^3