With the advent of rising debt obligations of Slovenia, a financial austerity is a well-justified approach by the government. The easier accessibility to credit and the meager risk assessment prior to the crisis had resulted in such unsustainable debt (OECD, 2015). The economic reforms in the form of financial consolidation, privatization and recapitalization of banks were hence required to drive the credibility of the country in financial market and spur the economic growth.The Keynesian Cross illustrates the aggregate demand and supply relationship in determining the equilibrium level of national income (Macrobasics, 2015). The consumer spending is a rising function of the consumer’s disposable income and in the Keynesian cross diagram, the level of equilibrium output is determined at the point where the total expenditure and supply of the economy intersects this curve of consumer spending. The intersection point hence establishes the equilibrium output Y of the economy.The 45° line represents the points where the aggregate expenditure equals the aggregate production in the economy; while, the blue line represents the aggregate demand of the economy. The intersection point is the level of equilibrium output of the economy. The Keynesian cross-equation is given as: The equation states that AD will rise with the increase in any of its component and hence, there will be excess demand in the economy as supply remains unchanged. Thus, the producers will increase their production and supply to meet the rising demand which will raise the aggregate supply and this process continues till the aggregate output reaches the AD and the equilibrium is achieved. The opposite situation happens when aggregate demand falls and excess supply prevails in the economy. The diagram illustrates well how the equilibrium is reached by the mechanism of demand and supply in the economy.The IS-LM model evaluates the relationship between interest and real GDP in the economy both in the product market and the capital market.
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