Using the Keynesian-cross model, explain what happens to output following a decrease in the interest rate?

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Expert Solution

Keynesian cross model explain the level of equilibrium investment and real GDP through intersection point where the aggregate expenditure or output equates the output produced. Investment is the function of national income and posses a positive relation between this two variables. Primarily the investment function depends on future economic condition. On the other hand, interest rate determine the level of investment, where both current and future interest rate. If interest rate increased, the saving rate rise and the investment rate fall down. When the interest rate fall down, this will increase the investment rate and also increase the level of aggregate demand and real output.

The rise in investment shown in the diagram through shifting the investment curve from l0 to l1. la is the autonomous investment and his the induced investment which is subject to change. The rise in investment induces the level of real GDP from Y0 to Y1.

Rahul Sunny answered 1 year ago

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