An aggregate demand schedule shows how much total spending is planned at different levels of income or output. In the Keynesian-cross framework, it is the spending line that determines whether firms will expand or cut production.
Keynesian-Cross Meaning
In this framework, firms compare actual output Y with planned expenditure AD(Y). If planned spending is above output, inventories fall unexpectedly and firms increase production. If planned spending is below output, inventories rise and firms cut production.
The basic equilibrium condition is:
[ Y = AD(Y) ]
A Simple Functional Form
A common specification is:
[ AD(Y) = C_0 + c(Y-T) + I + G + NX ]
where C_0 is autonomous consumption, c is the marginal propensity to consume, T is taxes, I is investment, G is government purchases, and NX is net exports.
Solving for equilibrium output gives:
[ Y^* = \frac{1}{1-c}(C_0 - cT + I + G + NX) ]
when the simple fixed-price assumptions of the Keynesian cross apply.
Why It Is Not The Same As The AD Curve
The aggregate demand schedule in the Keynesian cross relates spending to income. The aggregate-demand curve in AD-AS analysis relates spending or output demanded to the price level. They are connected, but they are not the same object.
Why Economists Use It
This schedule is useful for thinking about the multiplier, inventory adjustment, and how fiscal policy or autonomous spending shocks affect equilibrium output in a sticky-price setting.