top of page

An increase in government spending in the Keynesian cross model.

The Keynesian cross describes how income Y is determined, for any given level of planned investment I and fiscal policy variables G and T.

This model can be used to show how change in one of these exogenous variables affects income.

Let's consider how the economy is affected by a change in public spending.

Since government spending is one of the components of aggregate spending, an increase in government spending results in a higher level of planned spending for any given level of income.

If government spending increases by an amount ΔG, the planned spending curve shifts upward by an amount ΔG and, consequently, the equilibrium of the economy shifts from point A to point B.

This graph shows how an increase in public spending causes a more than proportional increase in income: in other words, ΔY is greater than ΔG.

The ratio ΔY/ ΔG, called the multiplier of public spending, reveals the extent of the increase in income compared to a unit increase in public spending.

One of the implications of the Keynesian cross is that the multiplier of public spending has a value greater than unity.


103 visualizzazioni0 commenti

Post recenti

Mostra tutti
bottom of page