Description                                  
Through an examination of the Keynesian Cross, the narrator explains macroeconomic equilibrium. 

Narrator: 
Using the expenditure approach, the GDP is measured by adding up all household consumption spending, investment spending, government purchases and net exports. 

Narrator: 
Consider the consumption function, it starts at the vertical intercept, which corresponds to autonomous consumption and its slope is the marginal propensity to consume. 

Narrator: 
Next, consider the planned investment function, which is treated here for simplicity as an autonomous function independent of income. 

Narrator: 
When planned investment is added to consumption, the resulting curve is parallel to the consumption curve shifted vertically by the autonomous investment value. Assume also that government purchases are autonomous. Adding government purchases results in another vertical shift of the curve. Net exports are also autonomous and are assumed here to be positive, though this may not be the case for many countries. This contributes to another vertical shift of the curve. By adding all the components-consumption, investment, government purchases and net exports, we derive the aggregate expenditure curve. 

Narrator: 
The 45° line that passes through the origin represents the points where aggregate expenditure equals aggregate income. The aggregate expenditure function crosses the 45° line at the point where the aggregate expenditure and aggregate income are equal. This graph, with its intersecting lines, is known as the Keynesian Cross, named after economist John Maynard Keynes. 

Narrator: 
Consider a case when aggregate expenditure exceeds aggregate income. When spending exceeds output, demand exceeds supply and firms experience a drop in inventories. To replace those inventories, firms hire more workers and production increases. As production expands, aggregate income increases until aggregate expenditure equals aggregate income at equilibrium. 

Narrator: 
On the other hand, when output exceeds aggregate expenditure, firms experience an increase in inventories. Firms cut production and lay off employees to reduce their inventories. The result is economic contraction. Reductions in production cause aggregate income to decline moving the economy towards equilibrium. 

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