Overview
The Keynesian Cross is a simple model of national income. In particular, it relates actual income to planned expenditures of agents in the economy.
Keynes believed that recessions and depressions were caused when demand falls and does not meet production. In this case, the planned expenditures of firms and households is less than the productive capacity of the economy.
{% Y = PE %}
where
- {% Y %} = Actual Expenditure
- {% PE %} = Planned Expenditure
{% PE = C(Y-T) + I + G %}
where
- {% C %} - consumption, which is a function of National Income, Y, and taxes T
- {% I %} - Investment
- {% G %} - Government Expenditures
Here we assume that {% I %} and {% G %} are fixed.
Keynesian Cross Charted
The Keynesian cross demonstrates the model that actual production is the intersection of planned expdentiture and the identity {% Y=X %}.
The slider moves the planned expenditure curve. The actual output is the point where the planned expenditure curve intersects the 45 degree {% Y=X %} curve.