Help for Economics Exam Question!

[bobsmegdorf]

Okay, so here's the question:

"Compare and contrast the expected impact of an increase in aggregate demand on the price level in the monetarist/new classical and Keynesian perspectives." [15 marks]

I wrote about the different levels of real output and price level that the economy would end up producing at for the monetarist SRAS/LRAS curve and for each section of the Keynesian AS curve. Is that enough for an IB answer?

[IBCONQUERER]

This is basically what it is.

The Keynesian perspective is that when the economy is not at full employment level, an increase in aggregate demand is met fully by an increase in output (that's the Flat part of the LRAS curve). But as the economy approaches its full capacity of employment the curve starts to slope upwards and so an increase in AD at this point will be met by a partial increase in price and a partial increase in output. When the economy is at full employment level, the only way to combat an increase in AD, is to increase the price. (The vertical part of LRAS).

Neoclassical theory states that the market always clears whenever there is a fall or rise in aggregate demand, so when there is a rise AD for labour shifts out and AS for labour extends and therefore, the wage rate goes up. Hence any change in AD is always met by a change in price. Therefore the LRAS curve is entirely vertical. Keynesian states that the market doesn't clear, because wages are sticky, so there is unemployment.

As far as my knowledge goes, I don't think the SRAS curve has any difference between the two, its upward sloping.

I believe this is what you said? I couldn't understand fully what you were saying but I imagine this is what you explained as well? If you did, it should be sufficient.

I hope I helped you.

Edited June 2, 2013 by IBCONQUERER

[bobsmegdorf]

Yup, it is!

Thank you so much for your help! I have more confidence in my answer now