Question

Macroeconomics

According to the Keynesian perspective, when GDP is at equilibrium it is not necessarily at an optimal state.

Start a Keynesian cross graph by labeling each axis and drawing the Planned Expenditure and Consumption lines.

How can we view the gap between the Planned Expenditure and Consumption lines? To answer this question, include the equation for Planned Expenditures in your response.

The economy is at equilibrium when aggregate income is equal to aggregate expenditures. Draw an equilibrium line in your graph to represent this relationship. Identify its slope and explain why the slope is that value.

What happens if aggregate income is higher than the equilibrium level? Show your answer graphically and in a brief written explanation.

What happens if aggregate income is less than equilibrium? Show your answer graphically and in a brief written explanation.

Answer 1

Answer:

Given that,

According to the Keynesian perspective, when GDP is at equilibrium it is not necessarily at an optimal state. Start a Keynesian cross graph by labeling each axis and drawing the Planned Expenditure and Consumption lines.

In Keynesian model,let us take a 3 vector economy.

At equation , Y=AE

So,

Let  

Slope of AE =

The slope of the curve depends on MPC and tax rate.

MPC Y   and t   r

In figure(b) , t point B,where C=Y ,we get break even point ,where Y=Y_B.Any point to the left of B, shows C>Y S (dissavings).

Any point to right of B,shows Y>C S (Savings accumulates).

In figure (a) ,E is the equation point,where Y=AE,At point A (left of E), AE>Y ie.,agg output>planned output.So,deflationary gap occurs.

At point C, AE<Y (inflationary gap arises).

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