Problem 13

Introduction

The expenditure-output model, also known as the Keynesian cross diagram, determines the equilibrium level of actual output/real gross domestic product (GDP) and corresponding the equilibrium level of aggregate expenditure through the process of equalizing the level of aggregate expenditure in the economy and the amount of total output produced. The intersection between the aggregate expenditure line and the 45-degree line determines the equilibrium level of real GDP and aggregate expenditure corresponding to the former in a Keynesian cross diagram.