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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

Use the accompanying figure to explain the following two statements:

images

  1. a. According to Keynes, aggregate demand may be insufficient to bring about the full-employment output level (or Natural Real GDP).
  2. b. A decrease in consumption (due to increased saving) is not matched by an increase in investment spending.

(a)

To determine

According to Keynes, why the aggregate demand is insufficient to bring about the full employment output level.

Explanation

The full employment output level is the level of employment where the workers who are willing to work at the prevailing market wages get employment. It is also known as the natural real GDP as it is the maximum GDP that the economy can make by utilizing the factors of production and resources efficiently. The aggregate demand is the summation of all the individual demand curves of the economy. Thus, it is the total demand of the economy at various price levels. The structure of the economy is given as follows:

(b)

To determine

Decrease in consumption is not matched by increase in investment.

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