The Keynesian Aggregate Expenditure Model

Paper Summary:

This paper examines two contradictory quotations regarding the same economic scenario and questions why the markets should fear a predicted economic slowdown if company profits are growing strongly. The paper presents the answer in the form of the "Keynesian Aggregate Expenditure" model, which is the generic term for several graphical models used to analyze the basic components of Keynesian economics and to identify Keynesian equilibrium as the intersection of the aggregate-expenditures line and the 45-degree line.

From the Paper:

"In other words, if consumers are spending less, it is unlikely that companies will continue to spend more and thus the companies will have to let workers go to make up for the decrease in consumer demand. The Keynesian model of aggregate demand was introduced in the 1930's as a answer to the worldwide great depression that the global economy found itself spiraling into after years of boom and financial speculation. Keynes departed from his predecessors when he ?rejected the view of Adam Smith that, left alone, a market system generally functions well,? namely that the "invisible hand? works when consumer confidence is low.? (Schenk, 1997, "Activism")"

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