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macro in a nutshell
The Keynesian cross

Keynesian crossThe Keynesian cross [deriving its name from the British economist John Maynard Keynes (1883-1946)] is a device that identifies equilibrium income. Here the term equilibrium income refers to the level of income at which planned spending exactly matches the level of output produced. This kind of equilibrium is, therefore, often called demand-side equilibrium.

The Keynesian cross contains two lines:

1. The 45° line measures actual demand which is always the same as income. At points above this line desired demand exceeds output; at points below this line the opposite is true.

2. The aggregate demand line indicates the sum of all spending plans.

The two lines cross in the grey circle, meaning that here actual spending equals planned spending, and that planned spending is perfectly compatible with income. Y0 is demand-side equilibrium income.

Further reading on pp. 33ff.
Click here for interactive applet featuring the Keynesian cross


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