Answered: Figure 2: Keynes's AD-AS Model The…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Attached: Figure 2: Keynes’s AD-AS Model

Question 1

Changes in which factors could cause aggregate demand to shift from AD to AD1? What could happen to the unemployment rate? What could happen to the inflation rate?

Question 2

The Keynesian AD-AS model describes what happens with price levels when aggregate demand increases. Could you find any evidence from the last ten-fifteen years that might support AD-AS model descriptions of demand-pull inflation, cost-push inflation, and recession? For example, you could find data on the GDP’s of any two countries from 2000 to 2017 to support your findings.

In macroeconomics, the immediate short run is known as a length of time when both input prices and output prices are fixed. In the short-run, input prices are fixed but output prices are variable. In the long run, input prices and output prices can vary.

What happens in the immediate short-run when AD rises from AD to AD2 to the price level and output?
What happens in the short-run when AD falls from AD to AD1 to the price level and output?
What will happen in each case in the long-run?

Figure 2: Keynes's AD-AS Model
The Keynesian AS curve
Price
Level
Up to real output level Yf
increases in AD have no effect
on the price level. Increases
in AD beyond Yf cause an
increase in the price level
but no increase in real output
AS
P1
P
AD2
AD
AD1
Ye
Yf
National income
(real GDP)
Copyright: www.economicsonline.co.uk
Economics Online. (n.d.). Aggregate supply. Retrieved from
http://www.economicsonline.co.uk/Managing the economy/Aggregate+supply.html

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