The Keynesian AS curve

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  • Created by: yana_00
  • Created on: 08-05-18 22:18

The Keynesian AS curve

Keynesian economist believe there is no distinction between the short and the long-run time periods and everything is determined by the level of capacity. During the Great Depression, the unemployment started to rise but wages didn't fall ( sticky wages). Therefore a new equilibrium below capacity has appeared creating a negative output gap in the economy thus lowering the AD. Because there is spare capacity and not all factors of production are being  fully utilised, unlike Classical AS curve ,Keynesian economists believe that the government should intervene and introduce policies to increase the AD (e.g. governement shouln't wait in the long-run for wages to go up but take actions straight away). There is no 'self-heal'. Some policies that can be used are fiscal policies - increase the goverment spending and lower the income/corporation taxes , or monetary policy such as decrease the interest rates.In a recession the goverment will have to borrow and run a budget deficit because in a boom the money will come back from greater tax revenues.

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