Income and expenditure: Keynesian cross and IS-LM model

Consumption function. Marginal propensity to consume and multiplier. Keynesian Cross and IS-LM model.

Marginal propensity to consume (MPC)

If you earn a $1, you might spend some fraction of it. This can then be income for someone else. This can keep going. In this tutorial, we'll explore how the incremental spend per incremental earnings (marginal propensity to consume) and the multiplier effect based on it can drive economic activity.

Keynesian cross

We now build on our consumption function models and start to explore ideas of planned expenditures as a function of output. When plotted with the actual output line, we get our Keynesian Cross which helps us think about whether the economy is operating at its potential.

IS-LM model

In this tutorial, we begin thinking about the impact of real interest rates on planned investment and output. We then use this to help us plot the IS curve. We then think about how, assuming a fixed money supply, as there is more economic activity, people are willing to pay more for money (helps us plot the LM curve). Finally, we use the IS-LM model to think about how fiscal policy can impact both GDP and real interest rates. You should watch the Keynesian Cross tutorial before this one.