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In the short-run Keynesian model of income determination what is the cause of the output gap,...

In the short-run Keynesian model of income determination what is the cause of the output gap, and what are the possible macro solutions?

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Keynesian model of income determination shows that equilibrium can be drawn without achieving full employment. in figure AD and AD been represented in y-axis where income and output been presented in  X-axis.asY1 level of output is not full employment level of output, it shows some workers are available in the economy to work. so here government took the initiative to invest so AD shifted to AD2.higher level of income Y2at this level the new equilibrium is e2. this level of output known as the full employment level of output. there exist deficient demand equal to ae2, which will exist if the economy operates under full-employment. in this situation, government intervention can restore full employment. the reason for output gap is deficient demand and which can only be solved by government intervation.

Rahul Sunny answered 6 months ago
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