Keynessian Problem The following graph presents an aggregate demand curve and tw

Question

Keynessian Problem

The following graph presents an aggregate demand curve and two potential aggregate supply curves. Potential output for this economy occurs at a real GDP of $6 billion. Because Keynesians believe that prices 1 In the region of the supply curve leading up to potential GDP, their conception of aggregate supply is best represented by the curve labeled 2. Assuming that the Keynesian model is correct, use the black line labeled New AD1 (X symbols) to draw the new aggregate demand curve that would restore potential output. Now, assume that aggregate supply Is more accurately represented by the other curve, and use the red line labeled AD2 (cross symbols) to draw the new aggregate demand curve that would restore potential GDP. You can see that if prices are Increasing in the region leading up to potential output, the shift in aggregate demand needed to restore potential GDP Is 3 than If the price level remains constant in this region. Because it is 4 that prices will not rise along with expenditures In this region, the Keynesian model 5 the amount of new spending necessary to restore potential output.

Explanation / Answer

Solution : PLease fill the blank accordingly

1. are fixed

2.ASa

3.greater

4.likely

5.understimates

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