Question

Describe Keynesian Economics, including the graph Keynes used. This is going to require at least 3 sentences for a perfect score, including an explanation of the curves depicted on the Keynesian Cross, and what is on each axis.

Answer 1

It shall be noted that Keynesian economics was developed by the British economist John Maynard Keynes during the 1930s in an attempt to understand the Great Depression. Keynes advocated for increased government expenditures and lower taxes to stimulate demand and pull the global economy out of the depression.

As per this theory, the optimal economic performance could be achieved, and economic slumps prevented by influencing aggregate demand through activist stabilization and economic intervention policies by the government. Keynesian economics is considered a "demand-side" theory that focuses on changes in the economy over the short run.

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Keynesian cross diagram determines the equilibrium level of real GDP by the point where the total or aggregate expenditures in the economy are equal to the amount of output produced.

Potential GDP Aggregate expenditure AE. E. Aggregate Expenditure 45° Y. Real GDP (Y)

It shows aggregate expenditures on the vertical axis and real GDP on the horizontal axis. A vertical line shows potential GDP where full employment occurs. The 45-degree line shows all points where aggregate expenditures and output are equal. The aggregate expenditure schedule shows how total spending or aggregate expenditure increases as output or real GDP rises. The intersection of the aggregate expenditure schedule and the 45-degree line will be the equilibrium. Equilibrium occurs at E₀, where aggregate expenditure AE₀ is equal to the output level Y₀.