Macro Foundations · intro
What moves on the Keynesian Cross diagram
Lower autonomous spending shifts the planned expenditure line down, reducing equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change. output by a multiple of the initial cut through the multipliermultiplierThe amount total output changes per dollar of initial spending change, powered by respending: 1/(1−MPC) in the simplest case. process.
Start at equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change., where planned spending equals output.
To cut the deficit, the government slashes programs and public sector jobs.
The expenditure line drops, and equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change. slides down the 45-degree line.
Income falls by more than the spending cut. This is why austerity in a downturn can shrink the tax base it was meant to protect.
Examiners ask this as: austerity, spending cuts, fiscal consolidation, contractionary, budget repair.
Other scenarios on Keynesian Cross