Keynesian Cross Diagram

You’ve probably heard of “Keynes”...the father of the macroeconomic theory that’s used by governments like the U.S. (nbd).

The Keynesian cross diagram is Keynes’ main ideas, all in one graph. Macroeconomists can use the Keynesian cross diagram to see where GDP is falling short of its potential, which means full employment is not reached. The theory is that spurring demand in consumers will help create more supply, which gets the economy closer to its fullest potential.

The Keynesian cross diagram has an x-axis representing real GDP and a y-axis showing average expenditure. Like most econ graphs, there are also two lines. Unlike most econ graphs, the two lines are both positively sloped (don’t worry...they still cross).

One line is at a 45-degree angle, and represents aggregate supply. The idea is that supply will meet demand as long as there are some people looking for a job, i.e. looking for a way to provide value for the economy.

The 45-degree line is where expenditure and income are equal, showing the ideal. For instance, when the economy isn’t on the ideal, there could be unplanned inventory being stocked up that firms thought they’d be able to sell. The opposite could also be a problem, when supply is too slow to meet demand.

The other line, which is less steep, represents aggregate demand for goods and services by both individuals and businesses. Where the two lines intersect is the equilibrium level of income and expenditure.

Macroeconomists try to use the Keynesian cross diagram to decide if the economy needs a boost...or if it’s chill.