Chapter 24

This chapter is important because it shows us how a change in autonomous expenditure affects real GDP and the price level. What components of aggregate expenditure are included in "autonomous expenditure"? One component of autonomous expenditure is government purchases of goods and services. Other sources are investment and exports. In this chapter, we will review how changes in investment or exports affects real GDP and the price level. In the next chapter, we will see how a change in government purchases affects real GDP and the price level.

An important result from this chapter is the idea of the multiplier. The multiplier means that a change in autonomous expenditure changes aggregate demand by a larger amount than the change in autonomous expenditure. Thus a change in autonomous expenditure may change real GDP by a larger amount than the change in autonomous expenditure. But, as the last section of the chapter shows, the amount by which real GDP changes is different in the short run and the long run.

Let's examine the case of a decrease in autonomous expenditure. In particular, suppose that autonomous expenditure decreases, perhaps because investment decreases or exports decrease. How does this change affect real GDP and the price level? To see part of the answer, click on the figure.