Question

In the simple Keynesian model, a rightward shift in the aggregate demand curve __________ result in a change in the price level when the economy is in the horizontal segment of the AS curve and ___________ result in a change in the price level if the economy is in the vertical segment of the AS curve.

Question 1 options:

	will not; will
	will not; will not
	will; will not
	will; will

Answer 1

Since in the Keynesian model, the AD curve is downward sloping but AS curve is initially horizontal line then it is a vertical line. Hence when in the simple Keynesian model, a rightward shift in the aggregate demand curve will not result in a change in the price level when the economy is in the horizontal segment of the AS curve and will result in a change in the price level if the economy is in the vertical segment of the AS curve.

All this can be seen in the below diagram that when AD cuts Vertical line only then Price is affected but when AD curve cuts AS at its horizontal part only quantity change and price level remains same.

Hence option first is correct answer.

first; will not; will