Keynesian Cross (45° Diagram)

What this diagram shows

The Keynesian Cross diagram shows how equilibrium national income is determined in the short run when aggregate expenditure (AE) equals total output/income (Y). The 45° line represents all points where spending equals income, while the AE curve shows planned spending at different income levels. Where these lines intersect determines the equilibrium level of national income, which may not necessarily be at full employment - a key Keynesian insight that justifies government intervention through fiscal policy.

Key points

• The 45° line shows Y=AE (income equals aggregate expenditure) - every point on this line represents potential equilibrium
• The AE curve is upward sloping due to the marginal propensity to consume - as income rises, consumption rises but by less than the income increase
• Equilibrium occurs where AE intersects the 45° line - this is where planned spending equals actual output
• If AE is above the 45° line, there's excess demand leading to stock depletion and increased production
• Fiscal policy shifts the AE curve: increased government spending or lower taxes shift AE upward, while spending cuts or tax rises shift it downward

Exam board notes

All major exam boards treat this diagram identically, though OCR tends to emphasize the mathematical relationships more explicitly. CIE occasionally asks for numerical calculations using this framework in their data response questions.