Aggregate Supply - Keynesian

Question 1

The Keynesian Aggregate Supply Curve

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

Question 2

Shifts in the Keynesian AS

Answer 2

Shifts in AS (where full employment
income Yfe increase):
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).
Shifts in AS (with no change in full
employment income Yfe):
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

Summary of key factors that shift the AS in the long run

Answer 3

Factors that increase the economy’s productive potential, or its full
employment level of output. These are the same factors that shift the
production possibility frontier to the right:

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