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Unformatted text preview: the position of the aggregate demand function and hence be manipulated to restore the economy to full employment. Students must draw the Keynesian cross diagram and show that according to Keynes's analysis Yad = C + I + G + NX. Thus, government spending adds directly to aggregate demand, while taxes do not affect aggregate demand directly. This is why when there are taxes disposable income does not equal aggregate output. It equals output Y minus taxes T: YD = Y - T. According to Keynes's analysis an equal increase in government spending and taxes in the economy that is in recession can restore full employment output as government spending leads to a multiplied change in aggregate output through the expenditure multiplier: (1/1-mpc) x G. The equal increase in taxes, only reduces consumer expenditure by mpc X T. Thus the final result is an increase in aggregate output....
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