In Keynesian 45 degree diagram, at the intersecting point between the linerepresentingand the line representingandtotal spending ofare exactly equal tonational income or real GDP. This means that the amount that is bought is exactlyequal to the amount that is actually produced. This is thelevel of outputin this model, shown as Ye.What happens when real GDP produced is less than Ye? If the amount consumers,firms, government and foreign countries want to buy isthan thequantity of real GDP, then there is insufficient output to satisfy total expenditure. Onthe other hand, if real GDP is greater than Ye, the amount that consumers and firmswant is bought isthan real GDP produced. Too many goods andservices are being produced relative to total expenditure.With too much spending relative to output produced, firms' inventories are sold, thusproviding firms with the signal toproduction, causing real GDP toto Ye. With too little spending relative to what is produced, firmsinventories increase, providing firms with the signal that they are producing too much,causing them toproduction, so real GDPto Ye.Through this mechanism involving changes in inventories that provide signals to firmson whether they should produce less or more, equilibrium_is restored.The equilibrium level of output need not be equal to potential output.When Ye is less than Yp, there is an output gap called aoutput gap. Atthan the natural rate ofYe, there is unemployment and recession. Actual equilibrium output isthan potential output, and unemployment is_unemployment. For potential output to be achieved, it would be necessary foraggregate expenditures to increase to close the deflationarythe increase of injections:andWhen Ye is greater than Yp, and there is an output gap called agap. Actual equilibrium output isgap throughoutputthan potential output, andunemployment isthan the natural rate of unemployment. For potentialoutput to be achieved, it would be necessary to haveexpenditures.aggregateIn the Keynesian cross model, equilibrium can occur at any level of output, andthere is nothing to guarantee that the equilibrium level of output will be the sameas potential output. Negativegap maypersist indefinitely.gap or positive

1. In Keynesian 45-degree diagram ... Blank 1: aggregate supply Blank 2: aggregate demand Blank 3,…

In Keynesian 45 degree diagram, at the intersecting point between the line representing and the line representing and , total spending of are exactly equal to national income or real GDP. This means that the amount that is bought is exactly equal to the amount that is actually produced. This is the level of output in this model, shown as Ye. What happens when real GDP produced is less than Ye? If the amount consumers, firms, government and foreign countries want to buy is than the quantity of real GDP, then there is insufficient output to satisfy total expenditure. On the other hand, if real GDP is greater than Ye, the amount that consumers and firms want is bought is than real GDP produced. Too many goods and services are being produced relative to total expenditure.

In Keynesian 45 degree diagram, at the intersecting point between the line representing and the line representing and , total spending of are exactly equal to national income or real GDP. This means that the amount that is bought is exactly equal to the amount that is actually produced. This is the level of output in this model, shown as Ye. What happens when real GDP produced is less than Ye? If the amount consumers, firms, government and foreign countries want to buy is than the quantity of real GDP, then there is insufficient output to satisfy total expenditure. On the other hand, if real GDP is greater than Ye, the amount that consumers and firms want is bought is than real GDP produced. Too many goods and services are being produced relative to total expenditure.

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter11: Managing Aggregate Demand: Fiscal Policy

Section: Chapter Questions

Problem 2TY

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