Aggregate Expenditure and Aggregate Supply
An economy is said to be in an equilibrium when aggregate expenditure is equal to the aggregate supply (production) in the economy. According to Keynes, the economy does not stay in a perpetual state of equilibrium but the Aggregate expenditure and Aggregate Supply adjust each other towards equilibrium. When there is an excess supply over the expenditure and hence the demand there is an inventory leftover with the producers, which leads to a reduction in either the prices or the quantity of output and hence reducing the total output (GDP) of the economy. On the other hand, if there is an excess of expenditure over supply, then there is excess demand leading to a increase in prices or output. Hence the economy constantly keeps shifting between excess supply ( inventory ) and excess demand. Thus, the economy is constantly moving towards an equilibrium between the aggregate expenditure and aggregate supply. In an under-employment equilibrium the Keynesian Cross refers to the point of intersection of the Aggregate Supply and the Aggregate Expenditure curve. The rise in the expenditure by either Consumption (C), Investment (I) or the Government (G) or an increase in the exports or a decrease in the imports leads to a rise in the aggregate expenditure and thus pushes the economy towards a higher equilibrium and thus reaching a higher level towards the potential of the GDP.
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