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### Course: Macroeconomics>Unit 5

Lesson 3: Keynesian cross

# Keynesian cross

Analyzing planned expenditures versus actual output using the Keynesian Cross. Created by Sal Khan.

## Want to join the conversation?

• Okay, I may be overlooking or forgetting something major here, but I don't get how this Keynesian cross and its equation is even possible. I thought C+I+G+NX was the expenditure approach to calculating GDP. But this equation presents aggregate expenditure as a function of aggregate income! Since the Y (aggregate income) here is equivalent to real GDP, shouldn't E=Y at all times? I thought what E and Y represent are just two different approaches to calculating the same thing, namely GDP.
• As you so rightly mentioned, actual expenditure will always equal output, since they are two sides of the same coin (my expenditure is going to be somebody else's income). However, note that (investment) expenditure also includes increase in inventories. So there could be a case where, as is mentioned in the video, actual expenditure equals output only due to an inventory build-up.

Using a more common sense approach, even in separate markets (microeconomics), there is a possibility where the market may not be in equilibrium, leading to excess demand or excess supply. In that case, through the price mechanism, the market once again moves back to equilibrium, just as the case is here.
• So how is the keynesian cross different from using aggregate supply and demand?
• So what does it Keynesian cross model mean at all?
(1 vote)
• I'm getting confused with the word choice here. How would we know with certainty what people's PLANNED expenditures are? Or the government's PLANNED expenditures? Wouldn't all we really know be what they ACTUALLY bought or consumed? Why not just call this expenditures?
• You would never know "with certainty" what the aggregate planned expenditures are for a country. These little models are just ways to help you get your head around big ideas. You can't take them too seriously, or you'll just get painted into a corner.

However, planned expenditures for a company are sometimes somewhat known (at least by that company) - they have some sense of their budget for the upcoming year normally. (Though plans often wildly change.)
• How do you find the equilibrium level?
• The equilibrium level is where the expenditure equals what is produced, which is the output (Y). Thus the intersection point of the planned expenditure function and the output function is the equilibrium.
• So, basically, in the equilibrium point Spending = Income? So there's no net savings?
• No, there is no net savings. If there were ever more savings than borrowing, the interest rate would go down, making the quantity of saving decrease and the quantity of borrowing increase. If there were ever more borrowing than saving, the interest rate would increase, which would increase the quantity of saving and decrease the quantity of borrowing.
• This may be a bit off-topic, but how come there are no videos on supply-side economics (especially when dealing with the Laffer curve)? I know supply-side economics has its critics (me included), but I think they would add more to the discussion on different ways of economic thinking.
• How come Y denotes income and also GDP or output?