Answer to Question #100189 in Macroeconomics for Georgia Griffiths

Question

Using the simple Keynesian model, discuss the impact of an increase in injections on the equilibrium size or the economy. Your answer should include a 45 degree diagram with any assumptions fully explained. (50 marks)

Answer 1

The Keynesian cross model is used to illustrate the relationship between expenditure and output. ... The 45-degree line shows where aggregate expenditure is equal to output. This model determines the equilibrium level of real gross domestic product at whichever point aggregate expenditures are equal to total output.

Investment and government expenditure are injections into the circular flow of income, while savings and taxes are leakages from the circular flow of income.

An increase in investment shifts the planned spending curve upward, which leads to an increase in investment, and a slight increase in investment gives a more significant increase in income. The described phenomenon was called the "multiplier effect".