- Keynesian cross
- The Keynesian cross is a diagram that finds the equilibrium level of real GDP where aggregate expenditure in the economy equals the amount of output produced.
- Aggregate expenditure schedule
- The aggregate expenditure schedule shows the total spending in the economy, made up of consumption, investment, government spending and net exports, at each level of real GDP.
Three ideas that decide where output settles
Can you name the three ideas that decide where output settles in the Keynesian cross?
At A-level the multiplier says how far output moves after a change in spending. These three say where it stops, and why it can stop in the wrong place.
An unplanned change in inventories is unsold goods piling up, or shelves emptying, because planned spending differs from output, which tells firms to change production.
Can you think of an example?
A car maker plans for sales that do not come, and unsold cars fill its yards. It cuts shifts the next month, so its output falls towards what buyers plan to spend.
A recessionary gap is the amount by which equilibrium real GDP falls short of potential GDP, so firms do not wish to hire the full-employment number of workers.
Can you think of an example?
Equilibrium output is £60 billion below potential GDP and the multiplier is three. A rise in government spending of £20 billion, not £60 billion, is enough to close the gap.
The paradox of thrift is the result that when every household tries to save more, national income falls and total saving need not rise at all.
Can you think of an example?
In a slump, worried families cut spending to build up savings. Shops sell less, their staff lose hours and earn less, and those staff save less, so total saving rises far less than families planned, and in a closed economy with fixed investment not at all.