i) According to the Keynesian theory, when is the economy in equilibrium in the short run?...

i) According to the Keynesian theory, when is the economy in equilibrium in the short run? How is this short run equilibrium restored?

Please answer both.

Solutions

Expert Solution

An economy is in equilibrium in short run when quantity of real GDP demanded is equal to quantity of real GDP supplied. This happens when the Aggregate Demand curve (AD) intersects Short Run Aggregate Supply curve (SAS).

In the above diagram, point E is the short run equilibrium where Po and Yo is the market equilibrium.

In case of any shift in the aggregate demand or aggregate supply, a disequilibrium occurs in the economy. Everything else held constant, the adjustment happens in the economy by means of changes in the price or output level. For e.g. - As shown in the below diagram, there is a positive productivity shock in the economy. As a result, the AS curve shifts to the right and hence there is a disequilibrium in economy. This will further result in decrease in aggregate price level and an increase in the real output.

Rahul Sunny answered 7 months ago

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