The Keynesian Cross

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The Keynesian Cross 14 autonomous change). As shown in Figure 12, the original aggregate demand curve is AD 1 and the increase in government purchases shifts the aggregate demand curve to AD 2 . What happens to output? It is unchanged from its original level. The price level rises from 100 to 105, but that’s the only effect of the higher level of government expenditures. In this case, the expenditure multiplier effect on real output (RGDP) is zero. Changes in aggregate expenditure lead to no increase in output. Try this exercise with a different autonomous change such as wealth or expectations. As the textbook explains in more detail, in the short run the aggregate-supply curve slopes upward, so an increase in aggregate expenditure will lead to some increase in output in the short run. In that case, the effect on real output in the short run will be greater than zero, but not as large as the basic expenditure multiplier we derived above ( 1 / (1 – MPC) ), which we derived without considering the effects of aggregate supply. So the important point is that supply considerations are important in constraining the impact of a change in aggregate expenditure on output.
The Keynesian Cross 15 Consumption C 2 C 0 C 1 Figure 1 D A B Y Representative Disposable Income
Page 1 and 2: ✦ The Keynesian Cross Some instru
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