Keynesian AS/AD

• What was Keynes's view on the variability of wages in the long term?

  He considered it a crazy assumption
• What does Keynes argue regarding when long run aggregate supply becomes vertical?

  It is not always vertical
• According to Keynes, what determines aggregate supply?

  The level of spare capacity
• What did Keynes agree with the classical model regarding aggregate supply?

  There is a full employment level
• According to Keynes, when can aggregate supply be horizontal?

  During periods of high spare capacity
• What does the "Full Employment level of output" represent in both the classical and Keynesian models?

  Maximum use of all factors
• Why did Keynes believe an economy could get stuck below full employment?

  Due to insufficient aggregate demand
• What did Keynes suggest would happen while waiting for wages to reduce in a recession?

  High unemployment and social unrest
• What real-world event influenced Keynes's economic theories?

  The Great Depression
• What is the term for when output is less than the full employment level in the Keynesian model?

  Deflationary or recessionary gap
• Why did Keynes argue that a deflationary gap could be a long-run equilibrium?

  Wages are sticky downwards
• According to Keynes, what results from wages being sticky downwards?

  Mass unemployment and unrest
• What type of demand side management did Keynes advocate?

  Active fiscal policy
• According to Keynes, what is the most direct way to increase aggregate demand in a recession?

  Increase government spending
• Why did politicians like Keynes's theory due to increasing aggregate demand?

  Without much inflationary pressure
• What advantage did Keynesian economics offer politicians in achieving macroeconomic objectives?

  Less conflict with inflation
• What is a major limitation of the classical model that the Keynesian model addresses?

  The timing of wage adjustments
• What key work did Keynes develop to revise aggregate supply theory?

  Keynes's General Theory
• With which economic model did Keynes fundamentally disagree?

  The classical model
• What specific assumption of the classical model did Keynes refute?

  The short-run/long-run difference
• What did Keynes consider "rubbish" in the classical economic model?

  The short run long run difference
• What sort of intervention did Keynes advocate for when an economy is stuck below full employment?

  Macroeconomic management
• What does Keynes say about the economy and self healing back to YF?

  The economy will not self heal itself
• According to Keynes, when can output increase without inflationary pressure?

  When there is lots of spare capacity
• During spare capacity, why is there little inflationary pressure when output increases?

  Reduced pressure on factors of production
• What did Keynes fundamentally disagree with regarding wages?

  That they adjust quickly downwards
• What is meant by the term "sticky wages" in Keynesian economics?

  Wages resist downward revision
• According to Keynes, what is the problem with waiting for the long run for wages to adjust?

  We will all be dead
• According to Keynes, what is another way, besides increasing government spending, to increase aggregate demand in a recession?

  Reduce income or corporation tax
• Why did Keynes suggest borrowing money during a recession?

  Future boom will compensate for it
• Why did Keynes advocate accepting a budget deficit during a recession?

  To increase aggregate demand
• Why did politicians find Keynes's theory appealing?

  It promotes a greater role for government
• What assumption of the classical model did Keynes critique?

  Wages being variable in the long term
• In the Keynesian model, what primarily determines aggregate supply?

  The level of spare capacity
• What concept from the classical model did Keynes agree with?

  Full Employment level of output
• What does the Full Employment level of output represent?

  Maximum use of factors of production
• With which economic model did Keynes fundamentally disagree?

  The classical model
• What did Keynes consider "rubbish" regarding the classical model?

  The short run long run difference
• According to Keynes, when does the long-run aggregate supply curve become vertical?

  At the Full Employment level of output
• What economic condition is represented by a horizontal aggregate supply curve in the Keynesian model?

  A recession with much spare capacity