In Keynesian 45 degree diagram, at the intersecting point between the line representing and the line representing and , total spending of are exactly equal to national income or real GDP. This means that the amount that is bought is exactly equal to the amount that is actually produced. This is the level of output in this model, shown as Ye. What happens when real GDP produced is less than Ye? If the amount consumers, firms, government and foreign countries want to buy is than the quantity of real GDP, then there is insufficient output to satisfy total expenditure. On the other hand, if real GDP is greater than Ye, the amount that consumers and firms want is bought is than real GDP produced. Too many goods and services are being produced relative to total expenditure.
In Keynesian 45 degree diagram, at the intersecting point between the line representing and the line representing and , total spending of are exactly equal to national income or real GDP. This means that the amount that is bought is exactly equal to the amount that is actually produced. This is the level of output in this model, shown as Ye. What happens when real GDP produced is less than Ye? If the amount consumers, firms, government and foreign countries want to buy is than the quantity of real GDP, then there is insufficient output to satisfy total expenditure. On the other hand, if real GDP is greater than Ye, the amount that consumers and firms want is bought is than real GDP produced. Too many goods and services are being produced relative to total expenditure.
Chapter1: Making Economics Decisions
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
Transcribed Image Text:In Keynesian 45 degree diagram, at the intersecting point between the line
representing
and the line representing
and
total spending of
are exactly equal to
national income or real GDP. This means that the amount that is bought is exactly
equal to the amount that is actually produced. This is the
level of output
in this model, shown as Ye.
What happens when real GDP produced is less than Ye? If the amount consumers,
firms, government and foreign countries want to buy is
than the
quantity of real GDP, then there is insufficient output to satisfy total expenditure. On
the other hand, if real GDP is greater than Ye, the amount that consumers and firms
want is bought is
than real GDP produced. Too many goods and
services are being produced relative to total expenditure.
With too much spending relative to output produced, firms' inventories are sold, thus
providing firms with the signal to
production, causing real GDP to
to Ye. With too little spending relative to what is produced, firms
inventories increase, providing firms with the signal that they are producing too much,
causing them to
production, so real GDP
to Ye.
Through this mechanism involving changes in inventories that provide signals to firms
on whether they should produce less or more, equilibrium_
is restored.
The equilibrium level of output need not be equal to potential output.
When Ye is less than Yp, there is an output gap called a
output gap. At
than the natural rate of
Ye, there is unemployment and recession. Actual equilibrium output is
than potential output, and unemployment is_
unemployment. For potential output to be achieved, it would be necessary for
aggregate expenditures to increase to close the deflationary
the increase of injections:
and
When Ye is greater than Yp, and there is an output gap called a
gap. Actual equilibrium output is
gap through
output
than potential output, and
unemployment is
than the natural rate of unemployment. For potential
output to be achieved, it would be necessary to have
expenditures.
aggregate
In the Keynesian cross model, equilibrium can occur at any level of output, and
there is nothing to guarantee that the equilibrium level of output will be the same
as potential output. Negative
gap may
persist indefinitely.
gap or positive
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