Macro Foundations · advanced
What moves on the Keynesian Cross diagram
A higher MPCMPCMarginal propensity to consume: the fraction of an extra dollar of income that gets spent rather than saved. steepens planned expenditure, raising equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change. output and amplifying all future shocks.
Watch the PE line's SLOPE, not its level.
Households now spend 80¢ of each extra dollar instead of 60¢, the line steepens.
EquilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change. output jumps and every future shock will hit harder: a steeper line is a bigger multipliermultiplierThe amount total output changes per dollar of initial spending change, powered by respending: 1/(1−MPC) in the simplest case. and a twitchier economy.
Examiners ask this as: mpc rises multiplier, steeper expenditure line.
Other scenarios on Keynesian Cross