Understanding the keynesian cross

Nick Rowe

"The Keynesian Cross AE curve is a quantity-constrained aggregate Engel Curve. An "Engel curve" shows the relation between quantity demanded and income. A "notional" Engel curve assumes that income is equal to that generated when you can sell as much as you want to sell. A "quantity-constrained" Engel curve assumes that income is constrained because you cannot sell as big a quantity as you want to sell. That's how Qd=a+bQ should be interpreted.

To my mind, the Keynesian Cross only makes sense in a monetary exchange economy. It would be complete nonsense in a barter economy. In a barter economy, if the apple producer cannot sell as many apples as he wants, and would demand more pears if he could sell more apples; and if the pear producer cannot sell as many pears as he wants, and would demand more apples if he could sell more pears: then the two of them would just get together and do a swap."

New keynesian macro, with and without barter