Question

What determines output in the short Run? Explain using the Classical model, Keynesian model or Phillips curve.

Answer 1

Taking the Keynesian model, the output is determined by the level of demand in the economy, and the demand in the economy will be determined by the consumption, government spending, investment and net exports. Any increase in these variables will increase the demand and thereby the output and any increase in these four variable will decrease the demand in the market and output.

Higher the demand in the market the higher the output will be. It is not necessary that the output in the short run is always at the optimum level i.e. the full output or the potential output level.