ECO 230 – Study Aid: Aggregate Expenditures or “Keynesian Cross” Framework
$
E’
C + I + G + Xn
y
ye ye’
1. y = C + I + G + Xn where y is real GDP/income and C, I, G, Xn are the components of spending
(represented by the C + I + G + Xn, or E – for Expenditures - line!)
2. Production by business is represented by the 45 degree line. Business produces an amount they believe
will be equal to Expenditures for that production (given the current price).
3. Equilibrium GDP/income occurs where the two lines intersect.
*4. Equilibrium y can change (by a multiplied amount – to ye’) if the Expenditure curve shifts. Likely
reasons (but not he only ones) for shifts include (ceteris paribus!):
C – real wealth changes, (stock, bond prices – or the overall price level): W/P inc. => shift E up.
- expectations of future income/inflation inc. => shift E up.
- Taxes decrease => shift E up (by –MPC times change in Taxes)
- Household debt unusually low => shift E up.
I – interest rate drops => shift E up.
- Acquisition, operating, maintenance costs of capital drop => shift E up
G – increase gov’t. spending => shift E up.
Xn – dollar depreciates (FC/$ decreases) => shifts E up.
- tariffs increase => shifts E up.
- foreign incomes increase => shifts E up.
5. ∆ye = 1/(1-MPC) times ∆Spending, where MPC is the marginal propensity to comsume = ∆C/∆DI, where
DI is disposable income = y-T.