Assume that economy is in a recession. Draw an AS AD diagram showing that. Throughly explain...

Assume that economy is in a recession. Draw an AS AD diagram showing that. Throughly explain the Keynesian approach solving that economic problem.

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Expert Solution

Economy in recession is shown by the following diagram.

Now, the following diagram is showing Keynesian approach to solve the problem.

As per the Keynesian approach, government either increases the spending or reduces the taxation. With increase in spending, the demand increases. It is now catered by new supply by the firms and while doing so, firms create new jobs. It increases the purchasing power and people spend more to increase the demand. Further, it is catered by supply of the firms and jew jobs are created again. It initiates a chain of positive economic activities and demand is stimulated and shifted to the right to achieve long run equilibrium as shown above.

Rahul Sunny answered 11 months ago

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