ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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a closed economy
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short period analysis
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AS is perfectly INelastic
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BOTH A AND B
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Detailed explanation-1: -This fundamental relationship between income and consumption plays a crucial role in the Keynesian theory of income determination. The consumption function is based on the assumption that there is a constant relationship between consumption and income, as denoted by constant b which is marginal propensity to consume.
Detailed explanation-2: -New Keynesian Economics comes with two main assumptions. First, that people and companies behave rationally and with rational expectations. Second, New Keynesian Economics assumes a variety of market inefficiencies – including sticky wages and imperfect competition.
Detailed explanation-3: -The expenditure-output model determines the equilibrium level of real gross domestic product, or GDP, by the point where the total or aggregate expenditures in the economy are equal to the amount of output produced.
Detailed explanation-4: -Keynes’s theory of the determination of equilibrium real GDP, employment, and prices focuses on the relationship between aggregate income and expenditure. Keynes used his income‐expenditure model to argue that the economy’s equilibrium level of output or real GDP may not corresPond to the natural level of real GDP.
Detailed explanation-5: -Keynes believed that there are two major factors that determine the national income of a country. These two factors are Aggregate Supply (AS) and Aggregate Demand (AD) of goods and services. In addition, he believed that the equilibrium level of national income can be estimated when AD=AS.