Question

: The planned expenditure crosses the 45° degree line is the equilibrium condition of the Keynesian...

: The planned expenditure crosses the 45° degree line is the equilibrium condition of the Keynesian cross model. Within the situation briefly explain and show graphically two cases of the Keynesian cross model:

  1. The output is higher than the equilibrium level

2 The output is lower than the equilibrium level

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Answer #1

Two cases of the Keynesian cross model are:

  • When output(Y1) is higher than the equilibrium output(Y*), it means that aggregate supply is more than aggregate demand which cause rise in unplanned inventory stock remain with the producer. So to control it, producer will decrease their Aggregate supply or output until the point E will reach where Aggregate demand is equals to aggregate supply.

  • When output(Y0) is lower than the equilibrium output(Y*), it means that aggregate supply is less than aggregate demand which cause fall in unplanned inventory stock remain with the producer. So to control it, producer will increase their Aggregate supply or output until the point E will reach where Aggregate demand is equals to aggregate supply.

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