This version of the Keynesian Cross works exactly like the original version for changes in aggregate expenditure. But it also allows for positive and negative supply shocks which show up as shifts in real aggregate supply due to changes in resource prices, productivity, etc.
152 Real Aggregate Supply in the Income-Expenditure Model
Learning Objectives
- Explain aggregate supply in the income-expenditure model and how the income-expenditure model correlates to the AD-AS model
We observed earlier the income-expenditure model doesn’t explicitly discuss aggregate supply, but it’s straightforward to add that. Recall Figure 1 below from our earlier discussion of aggregate demand in the Keynesian model. Figure 1 shows the pure Keynesian AD-AS model. Let’s think about how this corresponds to the income-expenditure model.