Answer to Question #190347 in Macroeconomics for Matsidiso

Question

With the aid of a diagram and using the Keynesian analysis , explain in detail how income and aggregate spending are affected by the following by the government spending and a cut in spending by European firms

Answer 1

Aggregate expenditure in Keynesian model is sum of consumption expenditure (C), Investment expenditure (I) government expenditure (G) and net of exports (X-M), when the government reduce spending and firms reduce their expenditure two components of AE will reduce which are G and I leading to downward shift in the AE curve from AE' this new AE' curve intersects AS curve at E' which suggests that the GDP has declined from 0M to 0M'