Macro Foundations · intro
What moves on the Keynesian Cross diagram
Higher autonomous government spending raises planned expenditure at every income level, shifting the expenditure line up and raising 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 injection.
EquilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change. output sits where planned expenditure crosses the 45-degree line.
The government commits to a large road and rail building program.
The expenditure line shifts up by the amount of new spending.
Watch the horizontal move: output rises by more than the initial spending, because each round of income becomes someone else's spending. That gap is the multipliermultiplierThe amount total output changes per dollar of initial spending change, powered by respending: 1/(1−MPC) in the simplest case..
Examiners ask this as: government spending, infrastructure, fiscal stimulus, multiplier, public works.
Other scenarios on Keynesian Cross