Answer to Question #155745 in Macroeconomics for Abdul Moiz Arif

Question

The planned expenditure crosses the 45° degree line is the equilibrium condition of the Keynesian

cross model. Within the situation, briefly explain the case of planned expenditure is less than the actual expenditures.

Answer 1

The Keynesian Cross is one of the most famous ways to model aggregate demand. With the help of this model, it is possible to determine such parameters as the equilibrium volume of output, the general price level in the economy, just as in the AD-AS model. Since the intersection of the total cost curves shows the full employment of resources in the economy, the Keynesian cross can also be used to analyze the phases of economic cycles. If real costs are higher than planned (that is, the level of output is greater than the level of full employment of resources), this means that firms could not sell as much as they planned, which entails a decrease in output, an increase in the level of cyclical unemployment, and therefore the country is experiencing a recession. If real costs are less than planned when the level of output is below the level of full employment, then firms, on the contrary, have less output than is required in the market, because of which they increase their output, and thus one can observe an increase in the economy.