Would like to know about how the simple Keynesian cross model may be solved for a unique equilibrium level of national income. And What impact a fall in interest rate would have on the equilibrium?
As I’m sure that you’ve read, the simple Keynesian cross model plots actual and planned expenditures (on the Y axis) against total income on the X axis. The full equation of the planned expenditure line is: E = C(Y – T) + I + G, where E is planned expenditure, C is consumption, I is investment, and G is government spending. C is a function of disposable income, so it’s written as C(Y – T), where Y is income and T is taxation, so Y-T is the amount of income left after taxes. Also, the simple model assumes that taxes T, government spending G, and investment I are all constant. This makes E a function only of Y, because Y is the only independent variable that changes on the right side of the equation. Because the equation describes a linear function, we can rewrite it as: E = mY, where E is planned expenditure, Y is total income, and m is the slope of the line that plots E as the dependent variable against Y as the independent variable. Now, this model says that at equilibrium, actual exp
