FIGURE 5 EQUILIBRIUM IN THE AGGREGATE EXPENDITURES MODEL
Ignoring government spending and net exports, aggregate expenditures (AE) consist of consumer spending and business investment (AE = C + I). Panel A shows AE and its relationship with income (Y); when spending equals income, the economy is on the Y = AE line. Panel B shows the corresponding saving and investment schedules. Point a in both panels shows where income equals consumption and saving is zero. Therefore, saving is positive for income levels above $4,000 and negative at incomes below $4,000. The vertical distance ef in panel A represents investment ($100); it is equal to I0 in panel B. Equilibrium income and output are $4,400 (point e), because this is the level at which businesses are producing just what other businesses and consumers want to buy.