Question

Please fully answer the question in detail: Real GDP can increase both because an economy has unemployment and because of economic growth. Explain fully the difference between these two ways of increasing GDP. Why does the Keynesian model focus only on increasing GDP by reducing unemployment and not on economic growth?

Will rate answer depending on the quality of response, thanks.

Answer 1

Real GDP = Nominal GDP / Price or Y/P

Increase in Y will directly increase RGDP.

A decrease in P will lead to increase in unemployment as per Phillips curve but a decrease in P will increase RGDP.

Keynes learned from Great Depression that unemployment will lead to decrease in aggregate demand and thus consumption. When consumption is low, production will also be less and the situation will deteriorate. there be a further increase in unemployment and decrease in income and demand. So, keynes wanted that Unemployment should be reduced by fiscal policy. This will increase consumer's income and thus aggregate demand. hence, RGDP will increase.

As per Keynes market forces cannot automatically and quickly increase GDP. They require time and hence , he was in favor of unemployment reduction.

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