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Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383

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BuyFindarrow_forward

Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383
Textbook Problem

“In the simple Keynesian model, increases in AD that occur below Real GDP will have no effect on the price level.” Do you agree or disagree with this statement? Explain your answer.

To determine

Impact of increase in the AD below the natural real GDP on the price level under simple Keynesian economics theory.

Explanation

According to the Keynesian theory, the aggregate supply curve is different from that of the classical assumption. The aggregate supply curve is horizontal up to the point where the economy reaches its natural real GDP level. After the natural real GDP level, it increases, but it is not an upward sloping curve. At the natural real GDP, the aggregate supply curve changes its shape from horizontal straight line to vertical straight line.

This means that under the natural real GDP, the Keynesian aggregate supply curve is a horizontal straight line. When there is an increase in the aggregate demand curve in the economy, it would shift rightward...

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