(a) Supply curve in the short period is inelastic.
(b) The supply is influenced by the increase in the quantity of money.
Select the answer from the code given below :
Keynesian Framework at Full Employment Analysis
This question examines the characteristics of the economy in the Keynesian framework when it reaches full employment.
Statement (a): Short-Period Supply Inelasticity
At full employment, the economy utilizes all available resources efficiently. In the short run, factors like capital stock and the available workforce are fixed. Therefore, increasing output further becomes difficult or impossible without significant price increases. This situation is represented by an inelastic (or vertical) short-run aggregate supply curve. Thus, statement (a) is true.
Statement (b): Money Supply Influence on Supply
In the Keynesian model, changes in the money supply primarily influence aggregate demand. While an increase in the money supply can stimulate demand and output when there are unemployed resources, its effect on *supply* at full employment is minimal in the short run. At full employment, the economy's productive capacity is the main constraint. Increasing the money supply further might lead mainly to inflation (a rise in the price level) rather than a significant increase in real output. Hence, the supply is not significantly influenced by the increase in the quantity of money in terms of *output* at full employment. Thus, statement (b) is false.
Conclusion
Based on the analysis, only statement (a) accurately describes the Keynesian framework at full employment.
Important Questions from Macroeconomics
- A less elastic IS curve means that :
- When LM curve is vertical, which one of the following is correct ? An increase in money supply will lead to :
- Crowding out will emerge in the economy, if :
- Which among the following were neglected by Keynes in his theory of employment ?
- Which of the propositions of the past income hypothesis of Duesenberry are correct ? Choose from the code below :
Statements :
I. The current consumption is a function of not only current income, but also the past income.
II. There is asymmetrical relationship between income and consumption during contraction and expansion.
III. Consumption income relationship is irreversible.
IV. Consumption falls less than income during depression, but the rise in consumption is much more during expansion.
Codes :
