Equilibrium level of national income is attained where the aggregate expenditure equals GDP. While 45⁰ line or GDP curve remains unmoved, the AE curve may shift upwards or downwards due to changes in its constituents. A shift in AE curve will cause an increase or decrease in the GDP.

For any AE line there is a unique equilibrium level of GDP. In case, the AE line shifts, it will disturb the equilibrium level of GDP. A change in GDP causes a movement along the AE curve. An increased desire to spend at each level f GDP causes a shift in the aggregate spending line. AE line will shift, when there is shift in the consumption function or desired investment spending.

Upward shifts in the aggregate spending take place when: (i) the individual household permanently increase their consumption spending at each level of disposable income and (ii) When the firms spend more on investment. e.g., inventory accumulation, more investment on fixed capital, etc.

An upward shift in the aggregate spending function means that the desired spending at each level of national income raises to and stays at a higher amount.

Two types of shifts can take place in the AE curve; these are:

First, the same addition to spending occurs at all level of income. In this case, the AE curve shifts parallel to itself as shown.


In point E₀ is the equilibrium level of national income where the initial aggregate spending curve AE₀ intersects 45⁰ line.

A parallel upward shifts in aggregate spending is shown by AE₁ which is parallel to AE₀.

The parallel upward shift in the AE line from AE₀ to AE₁ means that desired spending has increased by an equal amount at each level of national income. For example, at national income Y₀, the desired spending increases from e₀ to e₁, therefore, exceeds aggregate output (GDP). E equilibrium is reached at E₁, where national income (output) raises to Y₁ and spending is e₂. The increase in desired spending from e1 to e₂ is shown by moment  along AE₁, It is an indicued response to the increase in GDP from Y₀ to Y₁

Second. if there is a change in the propensity to spend out of national income. In this case, the slope of the AE line changes (i.e., marginal propensity to spend changes). Such a change occurs when the households decide to spend more of every rupee of (Z) is shown.


In equilibrium level of national income is attained at E₀, where the initial AE₀ curve intersects 45⁰ line. Non-parallel shift in AE is shown by the new AE₁ curve. It shows that the marginal propensity to spend at each level of national income has increased, therefore, the slope of AE₁ has changed. The new equilibrium level of national income is reached at E₁, where the new AE₁ curve intersects 45⁰ line. The new level of desired spending rises to e₂ and national income to Y₁.

Downward shift in aggregate spending occurs when there is decrease in consumption spending or in investment spending. Because of a fall in the aggregate spending the AE curve will shift downward shift in the AE:

First. a constant reduction and desired spending at all levels of national income. In this case, AE curve shifts downwards parallel to itself.


In equilibrium level of national income is attained at E₀, where the initial AE₀ curve intersects 45⁰ line. After a constant reduction in aggregate spending, the AE curve shifts downwards to AE₁. A fall in aggregate spending causes decrease in the level of output and income. The new equilibrium level of national income is attained at a lower level Y₁, and lower level of aggregate spending e₂.


Second. a fall in marginal propensity to spend (Z), out of national income. It will reduce the slope of the AE line. This kind of change in desired spending occurs when the households decide to spend less of every rupee of disposable income. The effect of a downward shift in aggregate spending is shown.

In the equilibrium level of national income is shown by E₀, where to initial AE₀ curve intersects 45⁰ line. After a fall in aggregate spending with marginal propensity to spend diminishing, the slope of the AE curve changes so that non-parallels AE₁ curve shifts downwards. The new equilibrium level of national incomes reached at E₁ where the desired spending falls to e₂ and the level of national income also falls to Y₁.

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