Question

The Keynesian zone of the aggregate supply curve is_._while the neoclassical portion is_.... O upward-sloping, downward-sloping horizontal; vertical O vertical; flat

Answer 1

Refer attached diagram and reasoning below the three answers

Answer 1. The Keynesian zone of the Aggregate Supply Curve is horizontal while the neoclassical portion is vertical.

Question2 How does the intermediate zone of the AD-AS curve follow Say’s law when Aggregate Demand shifts to the right?

Answer: SRAS moves closer to potential GDP and increases price level.

Question 3 Which of the following statements about expenditure multiplier effect is a false statement?

Answer: GDP does not change when the expenditure multiplier changes.

Reasoning The short-run aggregate supply curve is divisible into three zones—Keynesian zone, Neoclassical zone and Intermediate zone. As per Keynes, demand creates its own supply i.e. a change in the aggregate demand brings changes in real Gross Domestic Product and employment. Keynesian zone is located at the left of the SRAS curve. At that place it is nearly flat. Consequently, changes in aggregate demand will affect output. However, change in aggregate demand will have minute effect on the price level. As per Say’s Law, supply creates its own demand i.e. change in aggregate demand has no effect on the level of real gross domestic product or we can say employment . It affects only price level. In the attached diagram, Say’s Law can be demonstrated on the vertical neoclassical zone of the aggregate supply curve. The neoclassical zone is on the right of the SRAS curve where it is nearly vertical. Consequently,   movements in aggregate demand will bring change in the price level but will have small impact on output. It is important to mention that the intermediate zone in the middle of the SRAS curve is upward-sloping. Therefore, increase in aggregate demand will bring higher output and price level, whereas a fall in aggregate demand will cause decrease in output and price level.

Multiplier Multiplier indicates increase in National Income (in other words GDP) divided by increase in expenditure that finally leads to increase in income. So the third option is false statement.