keynesian approach

• Where is the economy initially in equilibrium?

  At the intersection of AD1 and LRAS
• What is the initial price level in the economy?

  AP1
• What is the initial output level in the economy?

  Y1
• What happens to AD when government spending increases?

  AD shifts from AD1 to AD2
• What is the effect of an increase in AD close to full employment?

  Large increase in average price level
• What is the change in average price level when AD increases?

  From AP1 to AP2
• What is the effect of a decrease in AD close to the elastic portion of LRAS?

  Larger decrease in real output than price level
• What is the change in real output when AD increases?

  From Y1 to Y2
• What happens to AD when net exports decrease?

  AD decreases from AD1 to AD3
• What is the change in real output when AD decreases?

  From Y1 to Y3
• What is the change in average price level when AD decreases?

  From AP1 to AP3
• What happens if AD decreases further from AD3 to AD4?

  No impact on average price level
• What is the change in real output when AD decreases from AD3 to AD4?

  From Y3 to Y4
• What are the effects of changes in Aggregate Demand (AD) on price level and output?

  • Increase in AD (e.g., government spending):
  • Price level rises (AP1 to AP2)
  • Real output increases (Y1 to Y2)
  • Decrease in AD (e.g., net exports):
  • Price level decreases (AP1 to AP3)
  • Real output decreases (Y1 to Y3)
  • Further decrease in AD:
  • No impact on price level
  • Real output decreases (Y3 to Y4)
• change in AD- keynesian approach