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how is the equilibrium national income (output) determined? explain using the Keynesian cross.

how is the equilibrium national income (output) determined? explain using the Keynesian cross.

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Answer #1

the graph shown below shows the Keynesian Cross model. There is a 45* line or the ideal consumption or income line. This line shows the points where all the income earned in the economy are consumed.

After that, we have AE line or aggregate expenditure line. This line includes Consumption, investment, government expenditure and net exports. The economy is in equilibrium at the point where the Ae curve meets the YE curve or where the aggregate demand curve meets the total expenditure curve. IN the below graph, the AE curve meets the YE curve at point "a" and then after an increase in the consumption the AE curve increased to a higher level increasing the equilibrium at point "b". The output at this points will be Y and Y' (after an increase in consumption.)

  

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