Question

3. What is aggregate investment spending? 4. Define Keynesian cross. 5. The aggregate supply curve can be divided into three unique regions. Describe these regions and show them on a graph.

Answer 1

Ans) 1) Aggregate investment expenditure is done by the private investors. It is also known as induced investment as it depends upon the level of profit. Its main determinant is rate of interest. It includes purchase of machinery, infrastructure or production input.

2) Keynesian cross is a 45° line which starts from origin, where planned aggregate expenditure is equal to real GDP.

3) Aggregate supply shows how much goods and services will be produced at given price level. It has three zones ÷ Keynesian, intermediate and Classical.

Keynesian stage ÷ here little is produced and a lot of resources are not utilized. Here production can be increased without increasing the price.

Intermediate ÷ here the growth slowly picks up the pace and some resources begin to exhaust. Slope slowly becomes steeper as more and more resources starts to exhaust.

Classical ÷ Here all the resources are fully employed. And if business wants to increase the production, they will have to raise the price in order to compensate for higher cost.

Keynesian Intermediate C lassical