KeynesCross

KeynesCross - iii. Even if national income were zero,...

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Intro Macro Supplementary Handout The Keynesian Cross (aka 45-degree line model) Idea: in the short, the total income is determined by the spending plans of households, businesses and government. The more people want to spend, the more goods and services firms can sell. The more firm can sell, the more output they will choose to produce and more workers they will choose to hire. Planned Expenditure: is the amount households, firms and the government would like to spend on goods and services. Assumption: (1) Closed economy, ie NX=0 (2) the economy is in equilibrium when actual expenditure(Y) equals planned expenditure. A) at any given price, ± ² ³ ² ´ ± µ¶ · ¸¹ ³ ± ³ º ´ ± ´ » ¸ ± ¸ » ¼ ½ ± µ¶ · ¸ » ¹ ² ³ º ² ´ » (figure 1) A-1) Three properties of Planned Expenditure: i. it is upward sloping ii. as income increase by a dollar, aggregate expenditures increase by less than a dollar.
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Unformatted text preview: iii. Even if national income were zero, planned expenditure would remain postive B) Actual Expenditure = Planned Expenditure That is what is produced must be purchased. (figure 2) That is what is produced must be purchased. If not , firms experience unplanned changes in inventories and this induces them to change production levels. Changes in production influence total income and expenditure, moving the economy toward equilibrium. (figure 3) C) This model shows aggregate demand at each level of price; the aggregate demand curve shows aggregate demand at each level of price when the level of income has been adjusted to it (short-run) equilibrium level. Intro Macro Supplementary Handout D) Shifts in Planned Expenditure...
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KeynesCross - iii. Even if national income were zero,...

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