Keynes Cross 2

# Keynes Cross 2 - THE KEYNESIAN CROSS AND THE MULITPLIER...

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THE KEYNESIAN CROSS AND THE MULITPLIER PART TWO AGGREGATE EXPENDITURE AND AGGREGATE DEMAND Recall from the Circular Flow Diagram that Income from Production (Y) Equals the total value of what is perduced equals spending on goods Therefore, we could plot a Aggregate expenditures and Income from production Diagram which is very similar to a Spending-Income Diagram. We can also call this a Keynesian Cross Plot or a Keynesian Cross Diagram. Define A-bar as the sum of C-bar plus I-bar plus G-bar plus NX-bar. This is the sum of all autonomous expenditures in the economy which do not depend on income. Abar= Cbar+Ibar+Gbar+NXbar NOTES ON EQUILIBRIUM (EQM) 1. Equilibrium occurs when no party in a market has an incentive to change what they are doing. 2. Eqm is a point toward which the economy is moving (unless something is preventing this movement) if the economy is not already in eqm. 3. If the economy is in eqm, it will stay in equilibrium unless something changes. Why is the intersection point between the lines (1) Aggregate Expenditures = Y and (2) Aggregate Expenditures = A-bar + mpc*Y If people have 75 dollars to spend, but there is only 10 dollars of goods there is going to be a shortage A E=Y AE=A-bar + mpc x Y Real Y Aggregate Expenditure 45 degrees 100 120 75 10 100 200

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@ 100 dollars there will be in equilibrium @120 dollars then there is going to be a surplus First Explanation: AE = C + I + G + NX = Y = C-bar + mpc*Y + I-bar + G-bar + NX-bar. If AE is spending on newly made goods, AE=Y=GDP
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Keynes Cross 2 - THE KEYNESIAN CROSS AND THE MULITPLIER...

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