Th2.4: Long Term - Keynesian LRAS

Question 1

Keynesian economists agree with classicists that there is full employment where the LRAS is vertical, however they also believe… why is this?

Answer 1

there can be equilibrium at less than full employment - where the curve is horizontal. this is because they don’t believe that a rise in unemployment rapidly leads to a fall in real wages

Question 2

Refer to PP

Look at Graph 5. Keynesians would agree with classicists that shift from AD3 to AD4…

Answer 2

is purely inflationary and would only increase price not output, as equilibrium point changes from P2Y3 to P3Y3

Question 3

Refer to PP

Look at Graph 5. However, they believe if the economy is in a deep recession then an increase from AD1 to AD2…

Answer 3

is the opposite and only increases output not price

Question 4

Refer to PP

Look at Graph 5. A shift of any AD curve to or from AD5 would lead to…

Answer 4

a change in both price and equilibrium

Question 5

With a Keynesian curve, what does the impact of a shift in AD strongly depend on?

Answer 5

the elasticity of the curve, and hence whether the economy is at near or full employment

Question 6

Refer to PP

Look at Graph 6. If the economy is producing at or near full employment, for example at AD1, then…

Answer 6

a rise in LRAS will increase output and decrease the price level. this is seen by the change in equilibrium to P2Y2

Question 7

Refer to PP

Look at Graph 6. If the economy is in a deep recession, for example producing at AD2, then…

Answer 7

an increase in LRAS will have no effect on prices or output. this is shown by the fact the equilibrium is still at P3Y3

Question 8

This is why Keynesians argue that…

Answer 8

during recessions the government needs to work to increase AD, rather than using supply side policies