|Book Edition||7th Edition|
What do we assume in the the Keynesian region of the aggregate supply curve?
The potential for different levels of spare capacity in the long run.
The Keynesian AS curve is perfectly elastic when there is substantial spare capacity but becomes progressively more inelastic as spare capacity diminishes. When there is no spare capacity left, it is actually fully inelastic at full employment. Because the AS curve's elasticity has changed, the impact of AD shifts will have varied outcomes for price level and real production.
This has significant consequences for forecasting economic policy outcomes. This is a great evaluative tool that may be used in exams since it shows how the relevance of a change in AD is dependent on the amount of spare capacity in the economy at any one time. It also contrasts nicely with the consequences predicted by classical theory.
Check on the explanation section below