1. The Keynesian Cross Chapter 9 Appendix McGraw-Hill/Irwin
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.

2. The Keynesian Cross
The Keynesian cross focuses on the relationship of total spending to the value of output, with no explicit distinction between price levels and real output
Aggregate expenditure: The rate of total expenditure desired at alternative levels of income, ceteris paribus

3. The Consumption Shortfall
Say the consumption function is:
With full employment output of $3 trillion, consumption at full employment is

4. The Consumption ShortfallZF
$3000
Total output
2350 CF
2000
Output not purchased by consumers
Expenditure
1500
1000
Consumption function
(C= $ YD)
500
45° YF
1000
2000
3000
Income (Output)

5. Non-consumer Spending
Investors, governments, and net export buyers add to consumer spending to equal aggregate expenditure
Aggregate expenditure still might not reach full employment

6. Aggregate Expenditure
At Income (output) of
Consumers Desire to Spend +
Investors Desire to Spend
Governments Desire to Spend
Net Export Spending =
Aggregate Expenditure
$ 500
$ 475
$ 150
$ 200
$ 50
$ 875
1,000
850
150
200 50
1,250
1,500
1,225
1,625
2,000
1,600
2,500
1,975
2,375
3,000
2,350
2,750
3,500
2,725
3,125

7. Aggregate Expenditure
Y = AE
3500 YF
Aggregate expenditure
(AE = C + I + G + (X – M))
3000 g f
EXPENDITURE
2500 e
2000 d
Consumer spending
(C= $ Y) c
1500 b
1000 a
500
Investment spending = $150
Government spending = $200
Net exports = $50
$500
$1000
$1500
$2000
$2500
$3000
$3500
INCOME (OUTPUT)

8. A Recessionary Gap
In this case, we end up with less aggregate expenditure ($2,750 billion) than the value of full-employment output
Recessionary gap: The amount by which aggregate spending at full employment falls short of full-employment output

9. Recessionary Gap Expenditure Income (Output) $3500 Output at YF AE = Y
3000 g
Recessionary gap
2750 f
Desired spending at YF
2500
Equilibrium
2000 E
Expenditure
1500
Aggregate expenditure
1250
1000
500
45° Y1 YE YF
$500
1000
1500
2000
2500
3000
Income (Output)

10. A Single Equilibrium
Expenditure equilibrium: The rate of output at which desired spending equals the value of output
The point where the AE and 45 degree lines meet
Producers have no incentive to change the rate of output, since are selling all they produce

11. Expenditure Equilibrium
Income (Output)
Expenditure
AE = Y
$500
1000
1500
2000
2500
3000
$3500
500
Equilibrium
45°
Aggregate expenditure E YE

12. Expenditure Equilibrium
At Income (output) of
Consumers Desire to Spend +
Investors Desire to Spend
Governments Desire to Spend
Net Export Spending =
Aggregate Expenditure
$ 500
$ 475
$ 150
$ 200
$ 50
$ 875
1,000
850
150
200 50
1,250
1,500
1,225
1,625
2,000
1,600
2,500
1,975
2,375
3,000
2,350
2,750
3,500
2,725
3,125

13. Macro Failure
Market participants’ spending desires could also exceed the economy’s full-employment potential
Inflationary gap: The amount by which aggregate spending at full employment exceeds full-employment output

14. Two Paths to the Same Conclusion
Both the Keynesian cross and the AD/AS framework lead to the same conclusion about macro instability
The former focuses on total spending, the product of output and prices
The latter distinguishes separate effects of macro instability on prices and real output

15. The Keynesian Cross End of Chapter 9 Appendix McGraw-Hill/Irwin
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.