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Keynesian cross model diagram

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Using the Keynesian Cross model diagram and equation (Y= C+I+G+X-M), critically and briefly illustrate the short run and long run economic impact of 2005 National Highway and Mass Transit Bill of $300 billion to be spent over the next five years. The impact will be in terms of major macroeconomic variables of US economy.

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Solution Summary

This solution provides the short and long run economic impact of the 2005 National Highway and Mass Transit Bill through the use of the Keynesian Cross model diagram and equation.

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According to the Keynesian Cross model, the expenditure of households, firms, foreigners and the government on domestic goods and services is expressed as E= C + I + G + NX. Consumption (C) can further be expressed as C + b(Y − T ), where b is the marginal propensity to consume, Y is income and T is taxes.

Thus we have
E = C + I + G + NX ---> E = C + b(Y -; T )+ I + G + NX

If we draw a graph of these with expenditure on the vertical axis, equilibrium is represented as a 45-degree line (slope of ...

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