Question

In the Keynesian zone of the aggregate supply curve, how is Keynes’ law, where demand creates its own supply, illustrated?

Prices change relatively little with an increasing aggregate demand, but that changing demand does effectively increase aggregate outputs because of the excess capacity in the economy.

Because the economy is closer to full output, aggregate demand either increasing or decreasing has a large effect on prices and little effect on aggregate supply.

Prices remain relatively static and outputs remain unchanged when aggregate demand decreases because the economy lacks excess capacity.

A weakness of the Keynesian economic view is that it:

can overlook the long-term causes of economic growth like the existing natural rate of unemployment even when the economy is at potential GDP.

focuses on the long-term factors for economic growth and not the short-term causes of economic growth such as why unemployment fluctuates up and down over a few years.

can overlook the short-term causes of economic growth or decline when the economy is stuck in a long-lasting recession.

Answer 1

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