12/11/2023 0 Comments Spending multiplier macro definitionThe final ingredient of the Keynesian cross or expenditure-output diagram is the aggregate expenditure schedule, which will show the total expenditures in the economy for each level of real GDP. Thus, the equilibrium calculated with a Keynesian cross diagram will always end up where aggregate expenditure and output are equalâwhich will only occur along the 45-degree line. When the macroeconomy is in equilibrium, it must be true that the aggregate expenditures in the economy are equal to the real GDPâbecause by definition, GDP is the measure of what is spent on final sales of goods and services in the economy. In this diagram, the 45-degree line shows the set of points where the level of aggregate expenditure in the economy, measured on the vertical axis, is equal to the level of output or national income in the economy, measured by GDP on the horizontal axis. A line that stretches up at a 45-degree angle represents the set of points (1, 1), (2, 2), (3, 3) and so on, where the measurement on the vertical axis is equal to the measurement on the horizontal axis. The second conceptual line on the Keynesian cross diagram is the 45-degree line, which starts at the origin and reaches up and to the right. Potential GDP means the same thing here that it means in the AD/AS diagrams: it refers to the quantity of output that the economy can produce with full employment of its labor and physical capital. The first is a vertical line showing the level of potential GDP. The Keynesian cross diagram contains two lines that serve as conceptual guideposts to orient the discussion. The Potential GDP Line and the 45-degree Line At some points in the discussion that follows, it will be useful to refer to real GDP as ânational income.â Both axes are measured in real (inflation-adjusted) terms. The sum of all the income received for contributing resources to GDP is called national income (Y). All sales of the final goods and services that make up GDP will eventually end up as income for workers, for managers, and for investors and owners of firms. Remember that GDP can be thought of in several equivalent ways: it measures both the value of spending on final goods and also the value of the production of final goods. Equilibrium occurs at E 0, where aggregate expenditure AE 0 is equal to the output level Y 0. The intersection of the aggregate expenditure schedule and the 45-degree line will be the equilibrium. The aggregate expenditure schedule shows how total spending or aggregate expenditure increases as output or real GDP rises. The 45-degree line shows all points where aggregate expenditures and output are equal. A vertical line shows potential GDP where full employment occurs. The Expenditure-Output Diagram The aggregate expenditure-output model shows aggregate expenditures on the vertical axis and real GDP on the horizontal axis. The axes of the Keynesian cross diagram presented in Figure show real GDP on the horizontal axis as a measure of output and aggregate expenditures on the vertical axis as a measure of spending. 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.
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