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Q. Determination of GDP in the cross model?
In the cross model, GDP is determined as the solution to the equation YD(Y) = Y
We may explain the determination of Y graphically:
Figure: Determination of GDP in cross model
All points on the 45-degree line has the same x- and y-coordinates. As we have Y on the x-axis and YD on the y-axis, YD = Y for all points on the 45-degree line. AD curve shows the aggregate demand YD as a function of Y. There is just one level of Y where aggregate demand is equal to Y, point where AD cuts the 45-degree line. This level is known as the equilibrium level of GDP and it is signified by Y*. Formally Y* is defined implicitly by YD(Y*) = Y*.
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