Problem 12

Introduction

In the expenditure-output model or Keynesian cross diagram, the expenditure function is formulated to find out the equilibrium state of an economy with the equilibrium level of aggregate expenditure corresponding to the equilibrium level of real GDP. This equilibrium position in the Keynesian cross diagram is determined at the point where the aggregate expenditure function intersects the 45-degree line. The equilibrium level of real GDP and the equilibrium level of aggregate expenditure are determined corresponding to that point.