Sage-Tips

What is the only equilibrium condition in the Keynesian cross model?

Equilibrium in the Keynesian cross model The point where the aggregate expenditure line crosses the 45-degree line will be the equilibrium for the economy. It is the only point on the aggregate expenditure line where the total amount being spent on aggregate demand equals the total level of production.

What are the assumptions of the Keynesian model?

Assumptions of the Simple Keynesian Model:

• Demand creates its own supply.
• The aggregate price level remains fixed.
• The economy has excess production capacity.
• The economy is closed — there is no export and import.
• There is no retained earnings.
• Firms are assumed to make no tax payments; all taxes are paid by households.

What is the Keynesian cross equation?

The equation Y = Y ad = C + I + G + NX tells us that aggregate output (or aggregate income) is equal to aggregate demand, which in turn is equal to consumer expenditure plus investment (planned, physical stuff) plus government spending plus net exports (exports – imports).

What is a Keynesian cross in macroeconomics?

The expenditure-output model, sometimes also called the Keynesian cross diagram, determines the equilibrium level of real GDP by the point where the total or aggregate expenditures in the economy are equal to the amount of output produced.

What is the condition of equilibrium income determination in simple Keynesian model?

According to Keynesian model, the equilibrium level of national income is determined at a point where the aggregate demand curve intersects the aggregate supply curve. The 45° helping line represents aggregate supply. By definition, output equals income on each point of aggregate supply curve.

What is the most important contribution of John Maynard Keynes?

His most important work, The General Theory of Employment, Interest and Money (1935–36), advocated a remedy for economic recession based on a government-sponsored policy of full employment.

What is the condition for determination of equilibrium national income in the simple Keynesian model?

What are the assumptions of the Keynesian theory of income and employment?

The main propositions of the theory are given below: (i) Total employment = total output = total income. As employment increases, output and income also increase proportionately. (ii) Volume of employment depends upon effective demand.

How is Keynesian cross multiplier calculated?

During a recession, or a recessionary gap, as Keynes called it, an increase in government spending will result in additional rounds of spending and income necessary to eventually reach full employment. Keynes’s formula for the multiplier is: Multiplier = 1/(1-MPC).

Which important macroeconomic variable is missing in the Keynesian cross?

For a given national income, if the income tax on consumers is reduced, then disposable income is higher, so consumption demand rises. The consumption function shifts upward, and the national income and product increases. Money is absent from the Keynesian cross model, and there is no role for monetary policy.

What are the assumptions of the Keynesian cross?

Assumptions. The Keynesian cross produces an equilibrium under several assumptions. First, the AD (blue) curve is positive. The AD curve is assumed to be positive because an increase in national output should lead to an increase in disposable income and, thus, an increase in consumption, which makes up a portion of aggregate demand.

Why is the Keynesian cross diagram a 45 degree line?

In the Keynesian cross diagram (or 45-degree line diagram), a desired total spending (or aggregate expenditure, or “aggregate demand”) curve (shown in blue) is drawn as a rising line since consumers will have a larger demand with a rise in disposable income, which increases with total national output.

Why is the investment function horizontal on a Keynesian diagram?

Precisely because investment decisions depend primarily on perceptions about future economic conditions, they do not depend primarily on the level of GDP in the current year. Thus, on a Keynesian cross diagram, the investment function can be drawn as a horizontal line, at a fixed level of expenditure.

What are the different models of Keynesian economics?

The models we will consider and the major characteristics of each are: Cross model: W, P and R are constant (and exogenous). IS-LM model: W, P are constant and R is endogenous. AS-AD model: W is constant, P and R are endogenous. The full Keynesian model: W is exogenous (but not constant), P and R are endogenous.