Chapter 9.4 Flashcards
1
Q
Why can’t the economy move into the long run when experiencing a deflationary gap in the Keynesian model?
A
Wages and prices that are inflexible in the downward direction
2
Q
How are inflexible wages and prices shown graphically?
A
The horizontal section of the Keynesian aggregate supply furve
3
Q
What are the three sections of the Keynesian AS curve?
A
Section I - real GDP is low and price level remains constant as real GDP increases
Section II - real GDP increases are accompanied by increases in price level
Section III - AS curve becomes vertical and GDP doesn’t increase anymore while price rises rapidly
