Question

What is the purpose of the AD/AS model, and how are the Keynesian and neoclassical perspectives different?

Explain how it is possible for one economist to accept both the Keynesian and neoclassical perspectives.

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

The AD/AS model is used to show the total amount of demand and the total amount of supply for all finished goods and services in a market where the Supply and Demand model shows the demand and supply of a single product in a market (Macroeconomics).

The Keynesian perspective focuses on aggregate demand whereas Neoclassical focuses on aggregate supply (Macroeconomics). The former holds that government assistance is one of the only ways to get out of a recession, but the latter says government assistance is not useful and might hurt the economy (Macroeconomics). Lastly, the Keynesian model emphasizes the short-run perspective, unlike the Neoclassical methods that favor the long-run perspective (Macroeconomics).

However, both of them have a different perspective on the aggregate supply curve. The Neoclassic model assumes that the economy is working at full capacity, which makes the curve a vertical line (Macroeconomics). So, even if there is an increase in demand, prices can only go up since there is no way for supply to increase. On the other hand, the Keynesian model assumes the economy isn’t working at full capacity and there isn’t inflation, which makes the curve a horizontal line (Macroeconomics) So, it doesn’t matter how much demand there is for a product or all products; the price will always be the same.

2

The AD/AS model needs both data for aggregate demand and aggregate supply. Neither models (Keynesian and neoclassical) emphasize both demand and supply. So a mixture of them is needed to create the AD/AS model.

Also, as said in the third paragraph of the first answer, the two method function at two different times. Neoclassical is for times that the economy is at full employment and increasing inflation like the late 1800s and late 1900s (Macroeconomics). Keynesian is for times that the economy isn’t at full employment without inflation like during the Great Depression in the early 1900s (Macroeconomics). Lastly, the Intermediate model assumes that the economy isn’t at full employment with inflation, making the curve a diagonal line that can go between, after, or before the other curves (Macroeconomics).

3.

The most interesting thing I learned from the podcast was that 23 people dead Ohioans were approved for mortgages (Macroeconomics).

Though the most heartwrenching thing was “lying, greedy mortgage banker[s]” were giving out NINA loans, meaning they gave people a bunch of money without first checking to see if they had any way of paying it back (Macroeconomics).

4.

A housing bubble is a run-up in housing prices fueled by demand, speculation, and exuberant spending to the point of collapse (Chappelow). This can be seen below:

When the housing bubble bursts, there became an overabundance of houses that were up for sale because people didn’t have money to buy houses nor keep the ones they had (Macroeconomics). This made the supply curve race towards the right as the demand curve did during the housing bubble. With the price (inflation) falling, unemployment would increase and the GPD would be below potential GDP (Greenlaw).