Think about a minor recession, like the one that occurred in 1990. (Hint: a minor recession could be caused by a slight shift to the left in the AD curve.)What would a Keynesian likely recommend in response to a recession? What would a neoclassical likely recommend? Why would a Keynesian policy response not make much sense in response to a minor recession like the one that occurred in 1990? What would be the cost of letting the economy adjust by itself to a new long run equilibrium?Now think about a major recession, like the one that occurred in 1982. (Hint: a major recession could be caused by a large shift to the left in the AD curve.) Why would a Keynesian policy make more sense in response to a major recession like the one that occurred in 1982? What would be the cost of following a neoclassical policy then? Take a look again at Figure 1 (originally from the page in the text titled "Neoclassical and Keynesian Perspectives in the AD-AS Model.")Price LevelPnPi*PkADKADYkADnEk Keynesian zoneReal GDPEiLRASYiEnSRASNeoclassical zoneIntermediate zoneYnFigure 1. Keynes, Neoclassical, and Intermediate Zones in the AggregateSupply Curve. Near the equilibrium Ek, In the Keynesian zone at the far left of theSRAS curve, small shifts in AD, elther to the right or the left, will affect the outputlevel Yk, but will not much affect the price level. In the Keyneslan zone, ADlargely determines the quantity of output. Near the equilibrium En. In theneoclassical zone at the far right of the SRAS curve, small shifts in AD, either tothe right or the left, will have relatively little effect on the output level Yn, butInstead will have a greater effect on the price level. In the neoclassical zone, thenear-vertical SRAS curve close to the level of potential GDP largely determinesthe quantity of output. In the Intermediate zone around equilibrium El, movementIn AD to the right will increase both the output level and the price level, while amovement In AD to the left would decrease both the output level and the pricelevel.

According to Keynesian macroeconomic theory, the best way to deal with a downturn is to expand…

Answered: Think about a minor recession, like the…

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter24: The Aggregate Demand/aggregate Supply Model

Section: Chapter Questions

Problem 59CTQ: Review the problem in the Work It Out titled Interpreting the AD/AS Model. Like the information...

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Think about a minor recession, like the one that occurred in 1990. (Hint: a minor recession could be caused by a slight shift to the left in the AD curve.)

What would a Keynesian likely recommend in response to a recession? What would a neoclassical likely recommend? Why would a Keynesian policy response not make much sense in response to a minor recession like the one that occurred in 1990? What would be the cost of letting the economy adjust by itself to a new long run equilibrium?

Now think about a major recession, like the one that occurred in 1982. (Hint: a major recession could be caused by a large shift to the left in the AD curve.) Why would a Keynesian policy make more sense in response to a major recession like the one that occurred in 1982? What would be the cost of following a neoclassical policy then?

Take a look again at Figure 1 (originally from the page in the text titled "Neoclassical and Keynesian Perspectives in the AD-AS Model.")
Price Level
Pn
Pi
*
Pk
ADK
AD
Yk
ADn
Ek Keynesian zone
Real GDP
Ei
LRAS
Yi
En
SRAS
Neoclassical zone
Intermediate zone
Yn
Figure 1. Keynes, Neoclassical, and Intermediate Zones in the Aggregate
Supply Curve. Near the equilibrium Ek, In the Keynesian zone at the far left of the
SRAS curve, small shifts in AD, elther to the right or the left, will affect the output
level Yk, but will not much affect the price level. In the Keyneslan zone, AD
largely determines the quantity of output. Near the equilibrium En. In the
neoclassical zone at the far right of the SRAS curve, small shifts in AD, either to
the right or the left, will have relatively little effect on the output level Yn, but
Instead will have a greater effect on the price level. In the neoclassical zone, the
near-vertical SRAS curve close to the level of potential GDP largely determines
the quantity of output. In the Intermediate zone around equilibrium El, movement
In AD to the right will increase both the output level and the price level, while a
movement In AD to the left would decrease both the output level and the price
level.

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