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Chapter 11: Q. 11.2 (page 232)

Discuss the essential features of Keynesian economics and explain the short-run aggregate supply curve

Short Answer

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During the Economic Crisis, john Maynard Keynes proposed a new fiscal policy theory based on spending cuts.

In the short term, the slope is upward. The current price and the quantity of product that a nation's economic industries will supply have a positive relationship.

Step by step solution

01

Step: 1 Essential  Keynesian economics features:

The Key characteristics of Keynes economic theory

During the Economic Crisis, john Maynard Keynes proposed a new fiscal policy theory based on spending cuts.

Keynesian economics suggests that the government should raise spending to create jobs and lower taxes to stimulate more consumer spending during recessions and other economic downturns. It promotes the use of fiscal policy, which is a combination of tax and spending policies, to maintain a healthy economy.

02

Step: 2 Short-run supply curve aggregate: 

The quantity supplied is the full number of offerings that all enterprises in the country will produce at any specific price / the sum of all industries' supply curves. Aggregate Supply Curve in the Short Run (SRAS)

In the short term, the slope is upward. The current price and the quantity of product that a nation's economic industries will supply have a positive relationship.

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Most popular questions from this chapter

Suppose that the Keynesian short-run aggregate supply curve is applicable for a nation's economy. Use appropriate diagrams to assist in answering the following questions:

aWhat are two events that can cause the nation's real GDPto increase in the short run?

bWhat are two events that can cause the nation's real GDPto increase in the long run?

Consider Figure 11-10. Suppose that the real interest rate suddenly declines for reasons that do not relate to the price level. What happens to the nation's aggregate demand curve? In the short run, will the nation experience an inflationary gap or a recessionary gap? Explain.

Between carly 2008 and the beginning of 2009 , a gradual stock-market downturn and plummeting home prices generated a substantial reduction in U.S. household wealth that induced most U.S. residents to reduce their planned real spending at any given price level. Explain, from a short-run Keynesian perspective, the predicted effects of this event on the equilibrium U.S. price level and equilibrium U.S. real GDP. Be sure to discuss the spending gap that the Keynesian model indicates would result in the short run.

Consider a country whose economic structure matches the assumptions of the classical model. After reading a recent best-seller documenting a growing population of low-income elderly people who were ill prepared for retirement, most residents of this country decide to increase their saving at any given interest rate. Explain whether or how this could affect the following:

a The current equilibrium interest rate

b Current equilibrium real GDP

c Current equilibrium employment

d Current equilibrium investment

e Future equilibrium real GDP

As in Problem 11-6, suppose that there is a temporary, but significant, increase in oil prices in an economy with an upward-sloping SRAS curve. In this case, however, suppose that policymakers wish to prevent equilibrium real GDP from changing in response to the oil price increase. Should they increase or decrease the quantity of money in circulation? Why?
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