Aggregate supply AS - Keynesian

Question 1

Explain what the Keynesian AS curve is

Answer 1

There is no distinction between the
short run and long run for AS in
the Keynesian model. The
Keynesian AS curve is curved.
Below Y1 AS is very elastic; the
economy has lots of spare capacity
and any increase in AD can easily be
met without inflation
Between Y1 and Yfe the AS
becomes less elastic: there is less
spare capacity; increase in AD can
be met, but costs to businesses
start to increase as firm compete for
skilled labour and other
scarcer resources; some inflation
For Yfe and above, the AS is
perfectly inelastic; there is no
spare capacity; an increase in AD
will cause inflation not growth

Question 2

Show and explain shifts in AS (with no change in full employment Yfe)

Answer 2

Any change that causes the costs of
production in the economy to
fall or rise will shift the AS curve
‘up’ or ‘down’ respectively.
(The same factors that cause the
classical SRAS to shift). However,
there is no increase in the
productive potential of the
economy.

Question 3

Show and explain shifts in AS (where full employment income Yfe increase):

Answer 3

Any change that causes the
productive potential of the economy
(full employment income) to rise will
shift the AS right (and vice versa).
(The same factors that cause the
classical LRAS to shift).

Question 4

What is a classical economist’s view?

Answer 4

Classical economists believe in the self-adjusting nature of markets, where
wages and prices are flexible, and the economy naturally tends toward full
employment. They argue that government intervention is often counterproductive.

Question 5

What is a Keynesian economist’s view?

Answer 5

Keynesian economists emphasise the role of aggregate demand and argue that
markets may not always self-adjust efficiently, especially during recessions.
They advocate for government intervention, such as fiscal policies, to manage
demand and stabilise the economy.

Question 6

What are key factors that shift the LRAS?

Answer 6

• Changes in government
  regulations
• Demographic changes and
  migration
• Competition policy
• Technological advances
• Changes in relative productivity
• Changes in education & skills