Macro Foundations · advanced
What moves on the Keynesian Cross diagram
A fall in the marginal propensity to consume flattens the planned expenditure line, lowering equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change. output and shrinking the size of the multipliermultiplierThe amount total output changes per dollar of initial spending change, powered by respending: 1/(1−MPC) in the simplest case..
The slope of the expenditure line is the marginal propensity to consume: how much of each extra dollar gets spent.
A financial scare makes households fear job losses, so they bank more of every pay rise.
The expenditure line gets flatter rather than simply shifting down.
A flatter line means a smaller multipliermultiplierThe amount total output changes per dollar of initial spending change, powered by respending: 1/(1−MPC) in the simplest case.: the same stimulus now buys less extra output. Slope changes and position changes are different exam answers.
Examiners ask this as: confidence collapse, mpc falls, precautionary saving, flatter expenditure, smaller multiplier.
Other scenarios on Keynesian Cross