Keynesian Cross Diagram
Keynesian Cross Diagram - Related Videos
01:31
Keynesian Cross
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2026
In a closed economy, planned aggregate expenditure (PAE) is the total amount of spending households, businesses, and the government expect to make on goods and services. The Keynesian cross model helps explain how the economy reaches equilibrium when planned spending matches the level of output produced. On the graph, the 45-degree line shows all points where output equals planned expenditure. The economy is in equilibrium at the point where the PAE curve crosses this line.Changes in interest...
01:26
Classical vs. Keynesian
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2025
Economists have long debated the best way to handle economic downturns. Some believe markets can fix themselves, while others argue that government action is necessary to speed up recovery. Classical economists think economies naturally return to stability as supply and demand adjust. If businesses struggle, lower wages and prices eventually encourage hiring and investment. They believe government intervention, like setting wage limits or increasing public spending, disrupts this process and...
01:21
Cross-Price Elasticity of Demand
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2024
At its core, cross price elasticity of demand quantifies the responsiveness of the quantity demanded for one product in response to a price change in another. It is calculated by dividing the percentage change in quantity demanded of one good by the percentage change in price of another. Substitute Goods: A positive cross price elasticity indicates that the goods are substitutes. The magnitude of this value reveals the strength of their substitutability. For example, a significant increase in...
FAQs
The spending multiplier amplifies an initial change in autonomous spending by changing equilibrium real GDP by more than the original amount in the model. An increase in consumption, investment, government spending, or net exports shifts planned expenditure and produces a larger income response; a decrease works in the opposite direction. This links spending disturbances to short-run fluctuations.
Consumption, investment, government spending, and net exports are the spending sources represented in planned aggregate expenditure. A change in any one changes the expenditure schedule rather than merely changing the label of an existing equilibrium. Comparing the resulting equilibrium income with the starting point helps show which component initiated the output change and how strongly the model transmits it.
The new intersection shows the equilibrium income associated with the altered level of planned expenditure. Comparing its horizontal position with the original intersection reveals the direction and size of the modeled output response. Because the change can be amplified by the spending multiplier, the difference between the two equilibrium income levels need not match the initial change in spending.
To construct the diagram, place real GDP on one axis and planned aggregate expenditure on the other. Add the 45-degree line as the benchmark, then plot the expenditure schedule implied by household, business, government, and foreign spending. The intersection identifies the starting equilibrium. Changing one spending component and plotting the shifted schedule provides the new equilibrium for comparison.
A change in government spending shifts planned aggregate expenditure, and the new intersection gives the corresponding equilibrium income in the model. The spending multiplier connects the size of the policy-induced spending change to the larger or smaller output response. This makes the diagram a visual framework for estimating short-run fiscal-policy effects.
The model is useful for examining short-run fluctuations and tracing how changes in autonomous spending affect national output. It organizes consumption, investment, government spending, and net exports within one expenditure framework. In macroeconomics courses and economic analysis, the diagram also provides a compact way to compare an initial equilibrium with the outcome after a spending change.