Macro Foundations · intermediate
What moves on the Keynesian Cross diagram
Higher desired saving cuts autonomous spending; the multipliermultiplierThe amount total output changes per dollar of initial spending change, powered by respending: 1/(1−MPC) in the simplest case. amplifies the fall in output, the paradox of thrift.
Households get nervous and decide to save more, spending drops at every income.
The multipliermultiplierThe amount total output changes per dollar of initial spending change, powered by respending: 1/(1−MPC) in the simplest case. runs in REVERSE: less spending, less income, less spending again.
Output falls by a multiple of the initial thrift. Individually prudent, collectively contractionary.
Examiners ask this as: paradox of thrift, saving more recession, consumption falls.
Other scenarios on Keynesian Cross