Problem 18 What does the aggregate supply c... [FREE SOLUTION]

Chapter 10: Problem 18

What does the aggregate supply curve look like in the simple Keynesian model?

Short Answer

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In the simple Keynesian model, the aggregate supply curve is completely elastic-horizontally shaped. This aggregate supply curve suggests that there are underused resources and production can increase without increasing the price level until the full employment level of output is reached.

Step by step solution

Understanding the Keynesian Model

At the core of the Keynesian economic model are the concepts of aggregate supply and aggregate demand. The Simple Keynesian model asserts that production decisions (output) are driven by demand factors, and the economy is demand determined.

Aggregate Supply Curve in the Keynesian Model

In the simple Keynesian model, the aggregate supply curve is perfectly elastic, or horizontal, at the economy鈥檚 current level of income. This horizontal curve is called a 鈥榝ixed price鈥� or 鈥榮ticky price鈥� AS curve. This model assumes that there are unemployed resources 鈥� particularly labor 鈥� so that increased aggregate demand will not immediately result in wage or price increases, but rather increases in output.

Contrasting with Classical Model

This is a departure from the classical model where the aggregate supply curve is perfectly inelastic, or vertical, reflecting the idea that the economy is supply determined. In summary, the aggregate supply curve in the Keynesian model is flat while in the classical model it is upright.