Part 2: Keynesian Cross
What was the economic context at the time Keynes was working on his ‘General Theory’? In terms of economic “vision”, what would you say was the core point Keynes was trying to get across to the political and economic community?
Draw the Keynesian Cross model. Label the axes clearly. Under the diagram, explain in words what it depicts. Include an explanation of what is meant by ‘equilibrium’ and explain the position and slope of the functions.
Show on the diagram the effect of a decrease in investment. What happens to equilibrium output in this scenario?
Is there a mechanism that will return the system to its original equilibrium output? Explain your answer.
If at the new output there is an unacceptable amount of unemployment, what could the government do to improve the situation?
Do you think this model is useful in thinking through appropriate responses to current global economic conditions?
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