Question

What is the importance of the aggregate demand, Keynesian cross, and expenditure multiplier? Explain the ISLM model fully and discuss the model's main conclusions and macroeconomic policy usefulness.

Answer 1

1) Aggregate Demand refers to the quantity demanded of all goods and services in an economy at different price levels. The Keynesian cross represents the relationship between output (real GDP) and aggregate demand on a graph. This diagram, having Keynesian cross and aggregate demand, helps to determine the equilibrium level of output (real GDP) and demand which is the level at which the desired spending curve (AD curve) equals the income giving equilibrium output that does not shows any recession or inflation. Hence these concepts are used to identify the macroeconomic policies which can be utilized to attain ideal economic situation.

Multiplier refers to a multiple by which the equilibirum income changes for a unit change in autonomous spending. This multiple is consider while formulating policies. In order to change government expenditure or money supply, the multiplier is considered which tells by changing initial spending, how much change will occurs in its effect on GDP.  

The Keynesian model,