Question

a) Identify and briefly describe the main ideas Keynesian economics is based on b) Contrast the appropriate Keynesian response to an economy experiencing recession with the appropriate Keynesian response to an economy experiencing inflationary pressures. Please include rough graphs in your answer.

Answer 1

Keynesian economics says that aggregate supply curve is upward sloping which says that wages and price are flexible.

Recessionary gap in Keynesian Economics: It occurs when short run output produced is less than potential output level and creates a gap of Ql - Qs

Inflationary gap in Keynesian Economics: It occurs when short run output produced is more than potential output level and creates a gap of Qs - Ql.