Question

1. What is the purpose of the AD/AS model, and how are the Keynesian and neoclassical perspectives different?
2. Explain how it is possible for one economist to accept both the Keynesian and neoclassical perspectives.
3. What was the most interesting thing you learned in the "Giant Pool of Money" podcast?
4. Explain how we can model the collapse of the housing market in the AD/AS model. Hints: When the bubble burst and wealth fell so rapidly, what curve will shift? When that curve shifts, what does that predict will happen to unemployment, inflation, and GDP?

Answer 1

1)

Aggregate demand and aggregate supply are viewed differently by the Keynesian and neoclassical. According to the neoclassical, government intervention is not required, and the self-adjustment process would lead to the full employment condition where the Aggregate supply would be vertical. Thus, AS is an important factor in determining the full employment in the economy.

Conversely, the Keynesian does not presume the vertical supply curve. the supply curve is horizontal and increase in the aggregate demand would reflect in the rise in the output only.

2)

Some economists accept the both Keynesians and neo-classical perspectives. Over the short run, the Keynesian explanation of economic fluctuation is correct while in the long run, the economy is at full employment level, thus here the neoclassical views hold true about the economy. Hence, economists accept the both theories depending on the time periods.

3)

Giant pool of money podcast was about the financial crisis of 2007-08 which was triggered by the housing loans or lending to the subprime borrowers.

"Giant pool of money" was radio show and it convinced people about the crisis and outcomes for society. People liked show and it led to positive attitude of people about economy.

4)

The collapse of the housing market led to a fall in the aggregate demand in the economy. thus only the aggretate demand was main cause behind the crisis. the AD shift to left thereby establishing the lower level equilibrium that corresponds to the under employments.