Equilibrium Level Of National Income In The Keynesian Cross Model Economics Essay

Equilibrium Level Of National Income In The Keynesian Cross Model political economy EssayNational income is defined as the enthronements and savings in a countrys economy. Keynesian beat archetype shows the formula for chemical equilibrium national income as Y= C +I+ G+ (X-M) where Y is the national income, C is mix consumption, I is aggregate investment, G is government pass, X is exports and M is imports. The aggregate entreat is an upward curve since it is mistaken consumers motive more when their disposable income is high. There is a irresponsible family between disposable income and consumption and in that locationfore it is true to argue that demand will always augment with increase in disposable income. Aggregate demand also increases as investment increases but is negatively affected if it happens that imports and taxes increase due to rise in investment since they negatively affect the investment level.The equilibrium level is at the point where AD, get along demand, is equal to Y, national output. At this point, total supply equals total demand. The major factor wind to a movement towards the equilibrium points is inventory changes as a declaration of changes in income and production- if it happens that the current output is more than the equilibrium level, inventories will accumulate controling to a let down down in production and thus a downward move towards the equilibrium. On the other hand, with a production level below the equilibrium, there is short of inventories and thus businesses will produce more leading to an upward move towards the equilibrium.If there is a rise in any of the aggregate demand components, C, Ip, G or NX, the demand curve shifts upward. The rises in these components screwing be as a result of increases in production because of increased optimism about the profitability in the future. This increase will lead to an increase in the equilibrium levels. Similarly, with a decrease in any of the demand compo nents, the demand curve shifts downwards and leads to a decrease in the equilibrium levels.Keynes effect assumes that quantity demanded increases with decrease in price and vice versa. With unending nominal money supply, decreasing price implies lower interest rates and thus higher spending. The major emphasis in this model is that a decrease in aggregate demand can lead to a stable equilibrium with substantial unemployment. Full employment is argued to be arrived at when there be adjustments in the aggregate demand.The equilibrium national income (Y) is as shown in the figure below. At Y, the desired spending curve intersects the total income curve AD=Y.Aggregate demandADNational incomeYYKeynesian cross model has a number of limitations. The first one is the fact that non on the whole of gross private domestic investment counts as part of aggregate demand (Dolan Lindsey, 1994, p.139). This means that the aggregate demand is undervalued since some investments, which need increa se aggregate demand is left out. It is expect that most of the investment is as a result of general over-production or un think inventory accumulation and thus there is always a decrease in national income whenever there is unplanned inventory accumulation. This implies that only the planned investment is included in the aggregate demand.Another limitation is that unlike all other demand curves, which atomic number 18 downward sloping, the aggregate demand curve in this case is upward sloping since it is assumed that an increase in national income or output will lead to increased disposable income and thus increased demand. The last limitation is the fact that the national output curve needs to be perpendicular than the aggregate demand curve for the two to intersect. This implies that it is assumed that the aggregate demand curve has a positive vertical intercept so as to cross Y curve.In Keynesian cross theory, it is assumed that an economy does not necessary need to have full employment for it to be stable. As it is advocated in classical theories that there should be full employment in the economy to prevent recessions and inflation, Keynes argues that an economy can be stable only when there is adjustment in the aggregate demand. This way, equilibrium aggregate income does not necessary mean full employment. J. M. Keynes supports this argument by stating that,Most, probably, of our decisions to do something positive, the full consequences of which will be bony out over many days to come, can only be taken as a result of animal spiritsof a spontaneous urge to action rather than inaction, and not as the result of a weighted average of quantitative benefits multiplied by quantitative probabilitiesif the animal spirits are dimmed and the spontaneous optimism falters enterprise will fade and die (Heijdra, 2009, p.25).It should be noted that although Keynesian cross model is simple and easy to understand, its limitations make it unreliable. Its demand curv e contradicts with all the other theories.