3.8 Keynesias AS Flashcards
What is the Keynesian model?
The Keynesian model is an alternative to the classical economists’ view of the economy. The classical economists argue that the LRAS curve is a straight line and that prices are flexible, while Keynesians argue that the adjustment to market shocks can take a long time and that the AS curve has a different shape.
What is the difference between the Keynesian AS curve and the classical LRAS curve?
The Keynesian AS curve makes no distinction between the short-run and long-run and is more complex, as it shows that there is no relationship between the price level and the level of AS at low levels of output. The classical LRAS curve assumes that prices are flexible and that markets tend to correct themselves quickly when pushed into disequilibrium by a shock.
What does the Keynesian model suggest about government intervention?
The Keynesian model suggests that the government should intervene to shift AD to the right in periods of mass unemployment to boost output, as there is no trade-off from higher inflation. However, if the economy is at full capacity, the government should not pursue AD expansion as it would result in higher price levels with no expansion of output.
What are Keynesian output gaps?
Keynesian output gaps represent under-employment in the Keynesian analysis and are likely to require government intervention to close. The theory of Keynesian output gaps was developed in the 1960s by Arthur Okun and the key distinction between a classical negative output gap and a Keynesian output gap is that the former is expected to sort itself out via market operations, while the latter requires government intervention.
