Keynesian Aggregate Supply/Aggregate Demand (AS/AD)

____________________ will not cause a shift of the as curve in a keynesian framework. This is a topic that many people are looking for. is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, would like to introduce to you Keynesian Aggregate Supply/Aggregate Demand (AS/AD). Following along are instructions in the video below:

“Everyone let s now compare the classical model to the keynesian model of aggregate demand demand and aggregate supply keynes fundamentally disagreed with the classical model and its assumptions. Especially said this whole short remora difference is complete rubbish doesn t exist in the real economy. He talked about wages being very good at the long term as a crazy assumption and therefore. He came up with a very different idea of aggregate supply and a very different idea of macroeconomic management in the economy.

First of all he talked about aggregate supply. Not being different the short run and the long run. He just said. Aggregate supply is aggregate supply full stop.

And it looks like this. It s determined by the level of spare capacity in the economy. So he did agree that there comes a point in the economy. Where production cannot increase sustainably and that is the full employment level of apple which represents the same idea in the classical model.

Which is maximum use of all factors of production in the economy at sustainable levels. And he agrees there comes a point at 1 apple level where the economy can t move beyond that sustainably and that s the full employment level backward. So there is a point where the long run aggregate supply curve becomes vertical. But he argues that it s not always vertical.

No way there are times. Where it can be horizontal is up which represents the point in time when there is so much spare capacity in a recession for example in which case an economy can be stuck way way less than full employment and therefore needs some sort of macro management needs some sort of policies to actually get back to full employment. The economy will not self heal itself back to y fe..


He also argues that when there is lots of spare capacity output can increase without any inflationary pressure at all which is why this curve can be rasaan ttle and that s simply because during periods of lots of spare capacity when output increases. There isn t much pressure put on resources on factors of production therefore the price of those resources doesn t have to rise in which case there might not be any inflation as output increases at all which is why the curve can be horizontal. As well. So his fundamental disagreements come with this notion of short run and long run.

The fact that we wages change in the long run and become variable and the classical economists believe that when that happens the economy will sell field k. Says. No that s a terrible assumption to make because workers do not like to especially reduce their wages in a period of recession. And it s an in recession.

This is one major problem exists when workers don t realize that norway s expectations who likes to take a pay cut nobody in his terminology wages are sticky. Going. Downwards workers are very resistant to a pay cut in which case. If you wait for the long run you wait for wages to reduce for the economy to self heal.

Well then as you keep waiting for that long run. We ll all be dead using keynes terminology right there that s exactly what you said. He said well you re going to keep waiting waiting waiting waiting and the problem is as you re waiting one gonna be suffering as an economy with very high levels of unemployment and all the social unrest. The problems are back and brain in which case you wait for wages to adjust downwards.

We ll all be dead by the time that happens. And he said that during the great depression in the late 1920s and early 1930s. When politicians were very much following a classical school of thought waiting for wages to revise downwards and for the economy to self heal..


There was no evidence of that taking place and this was said. This is what fueled keynesian argument. This is what fueled keynes to come up with his general theory. And to say no let me revise what aggregate supply looks like and therefore let me the new field and basically.

He said in periods of recession. So over here where output of the economy is weight less than the full employment level of output known as a deflationary or recessionary gap. In the keynesian model. So the deflationary or a recessionary gap.

Keynes. Argued that that could well be a long run equilibrium. That doesn t just have to be a short term equity remark. The classical economies would argue that could will be a long term equity room why because wages don t adjust.

He said. Where did is stinky downward. We re not going to see revise down a revision downwards of wages at all we can be stuck there for the long term in which case. The economy is going to suffer from mass unemployment.

It s going to suffer from unrest and the social issues that i can bring therefore. He said. What we need is not to wait right waiting will just lead to more problems..


He says we need active demand side management of the economy policies that will increase aggregate demand. But i ll move the economy closer to a full employment levels of output and he said in a recession. The easiest way to do that the most direct way to do that is to use active fiscal policy. An increase in government spending and a reduction in income tax or corporation tax to increase aggregate demand to take it s closer to why he basically to do something like that and he said.

If that means borrowing money. The governor has to borrow then so be it because in times of boom that money will come back to the gum with higher tax revenue connection and lower government spending necessary. So he says. Yeah fair enough take a budget deficit in that year.

Except borrowing. Except. The ps ncr. Whatever do so to increase aggregate demand that s necessary otherwise.

We ll be stuck here the economy will suffer. Now. It s no surprise that politicians like this idea like this theory. Very much because promoted a greater role for government it meant that governments could increase in size.

And it also meant that if it worked politicians can you know very much you know target. The fact that they go bald and use that as a great way to actually gain popularity. So politicians liked it for that reason too..


But also it was a a nice theory for politicians to follow because it meant. But maybe they can increase ad without much inflationary pressure. According to keynes. Which again meant that they can achieve that macroeconomic objectives.

Without the conflict of inflation that normally would come about from an increase of ad. So there s no surprise that in there during the great depression. This became got a quite a successful theory. Quite a popular theory to adopt for those reasons.

There. And it takes away the major issue of a classical one of the major limitation. Which is well when is the long run when does the long run occur. There is no timeframe put on it when the wages become variable.

If they become variable it takes away that limitation and directly the economy can could move towards full employment. Loves about them all right so that s the keynesian model. They re taking away the major limitations of wages. The assumption of wages had there been very read the long term in the classical model.

I hope that makes sense thanks for watching see you ” ..

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