The Simple Keynesian Model, which is also known as the Keynesian Cross, emphasizes one basic point. That point is that a decrease in aggregate demand can lead to a stable equilibrium with substantial unemployment.

The Simple Keynesian Model application first explains the roles of consumption and investment and then explains the accounting identity Y = C + I + G. Together, these elements determine the equilibrium level of output.

The policy analysis experiments study the effects of animal spirits and fiscal policy. The numerical results illustrate the calculation of a fiscal policy multiplier.

A concluding experiment extends the model to make investment a function of the interest rate. Graphing the shifts in investment caused by changes in interest rates then reveals a simple version of the IS curve found in an IS/LM analysis.

**Model Link: The Simple Keynesian
Model
**<activate
the model links

Printable PDF Exercises

The Simple Keynesian Model is important not so much for its ability to capture the details of recessions, but for its ability to demonstrate the possibility of a stable equilibrium at less than full employment. While the real wage rate adjusts in the Classical Model to move the economy to full employment, the real wage rate does not appear in the Simple Keynesian Model and equilibrium is achieved by adjustments in aggregate demand, which equals aggregate income. The equilibrium aggregate income need not imply full employment.

**Animal Spirits?**

"...most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result ofanimal spirits--of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities...if the animal spirits are dimmed and the spontaneous optimism falters... enterprise will fade and die," - J.M Keynes:The General Theory of Employment, Interest, and Money.

**Classic
Economic Models**

**Macroeconomics**

**Introduction**

Overview of Macro Models

**Models in Chronological Order**

The Classical Model

The Simple Keynesian Model

The Keynesian IS/LM Model

The Mundell-Fleming Model

Real Business Cycles

The IS/MP Model

The Solow Growth Model

**Financial Markets
**
Utility-Based Valuation of Risk

Mean-Variance Analysis:

Risk vs. Expected Return

Fixed Income Securities:

Mortgage/Bond Calculator

Growth Investments:

Present Value Calculator

**Microeconomics**

**Introduction**

Overview of Micro Models

**Supply and Demand**

Basic Supply and Demand

Who Pays a Sales Tax?

The Cobweb Model and

Inventory-Based Pricing

**Theory of the Firm**

Perfect Competition

Monopoly and

Monopolistic Competition

Price Discrimination

The Demand for Labor

**Theory of the Consumer**

Two Goods - Two Prices

Intertemporal Substitution

Labor Supply, Income Taxes,

and Transfer Payments

**Resources**