1. Explain the basic assumptions of the Keynesian national income determination model. 2. The assumption that...

1. Explain the basic assumptions of the Keynesian national income determination model.

2. The assumption that , imposed by the Keynesian model, has two main implications. Outline these assumptions.

Prove that

Solutions

Expert Solution

1) the basic assumptions of the condition national income determination model are:

Keynesian model is a short run income determination model.
The price level is fixed.
Technology remains fixed in the short run.

2) The assumption of short run income determination imposed by the Keynesian implies that in the short run aggregate demand management policies will lead to a change in output. This is because in the short run there is Wage and price rigidity according to Keynesians which stop the economy from attaining full employment. Therefore according to Keynes, economy always operates below full employment in the short run. And aggregate demand management policies can be used by the government to take economy towards full employment.

The assumption of price level being fixed implies that in the Keynesian model, adjustment towards equilibrium happens solely through the adjustment in aggregate demand and output there is no adjustment happening through the price.

Rahul Sunny answered 1 month ago

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