"Our recent recession seems to demonstrate again that expenditures and incomes depend on each other. If markets do not self-adjust how can a decline in spending lead to a negative process that ruins an economy? Consider referencing the keyneisian cross and/or the aggregate demand/ aggregate supply diagram to illustrate your points"
Expenditures and income always depend on each other. Since every person earns money (or, in other words, income) and purchases goods and services, that is expenditures. That is why the national income in economics is considered from two points of view – both expenditures and income. According to the expenditures approach, national income consists of personal consumption, government consumption, private domestic investment and net exports. The income approach claims, that national income includes personal consumption, taxes, savings and imports of goods and services. Violation of this balance leads to economic decline, which we are facing now.
The fact that market cannot regulate itself has already been proved by J. Keynes who also considered government to play an important role in the economic cycle. Cyclical unemployment and decline in production are inevitable for the economy. In order to avoid major disruptions the state should pursue an active government policy to stimulate aggregate demand. Let’s observe it using "Keynesian Cross".
Aggregate demand (AD) is planned expenses. In other words, it is the amount planned to be spent on goods and services. Aggregate Supply (AS) is the actual expenses. Ideally, the actual expenses should coincide with planned expenses. That is why the aggregate supply curve is constructed at an angle of 45 ⁰. At point A, where the curves of planned and actual expenses intersect, Y = E equilibrium is reached, i.e. planned and actual investments and savings counterpoise. But in real life it is not always occur. When the economy actually produces more than it consumes (Y1), an unplanned increase in inventories takes place. This means that sellers produce more than consumers buy (AS > AD). Enterprises start to produce less and fire workers, which results in GDP reduction. Over time, the level of production (Y1) reduces to a level (Y), which will balance the planned expenses and income. As a result the balance between aggregate demand and aggregate supply is achieved (AD = AS).
If the actual output (Y2) is less than planned, then consumers want to buy more than enterprises produce (AD > AS). The present demand is satisfied by the reduction of inventories. This leads to an increase in production and level of employment as well as the growth of GDP. That amount of production will increase to equilibrium (Y) and reach the balance (AD = AS) again. As we can see, disparity of income and expenses leads to a breach of equality G+ I + X ≠ T + S + M, which in any case is followed by a decrease in GDP.
The reduction of expenditures that is any component of aggregate demand (C + G + I + NX), results in …