First appeared in Paul Samuelson, Economics (1948)
A graphical depiction created by students of Keynes in order of exposition for his basic ideas.
In this graph: Expenditure is represented by "E" (in the equation and on the vertical axis). It is made up of Income, interest rate minus inflation (real interest rate), government spending, and taxation. If the interest rate increases investment is lower and aggregate expenditure falls (shown in graph). This is shown as creating a decrease in aggregate output (on the horizontal axis).
- Vertical Axis: Expenditure
- Horizontal Axis: Output
- 45-degree line: Output must equal income in equilibrium and Expenditure must equal income because savings is included in expenditure.
- Government Spending: (G) consumption by government
- Taxes: (T) Taxes, the revenue source for government consumption
- Output (Income): (Y) A.K.A. G.D.P. (Gross Domestic Product)
- Interest rates: (i) the price of bonds in terms of yeild, by definition nominal.
- Inflation: (pie) the percentage change in the price level