Question

Explain why the short-run aggregate supply curve might be fairly flat in the Keynesian zone of the SRAS curve. How might we tell if we are in the Keynesian zone of the AS?

Short answer

The Short-run Aggregate Supply (SRAS) curve is relatively flat in the Keynesian zone due to the presence of spare capacity or underutilized resources in the economy, such as high levels of unemployment and unused production capacity. In this zone, firms can increase their output without significantly increasing their costs. Thus, changes in price level have little impact on the output level. To identify if we are in the Keynesian zone, we can look for signs like high unemployment, the presence of an output gap, and a low inflation rate, which indicate that the economy is operating below its full capacity and has potential for growth without triggering high inflation.

Step-by-step solution

Define Short-run Aggregate Supply (SRAS) curve and its zones

The Short-run Aggregate Supply (SRAS) curve shows the relationship between the price level and the quantity of output that firms are willing to produce in the short run. It is upward sloping because as prices increase, firms are more willing to produce and supply goods and services. The SRAS curve is traditionally divided into three zones: the Keynesian zone, the Intermediate zone, and the Classical zone. Each zone has distinct characteristics and economic implications. 1. Keynesian zone (lower portion): The SRAS curve is relatively flat, meaning that changes in price level have little impact on the output level. 2. Intermediate zone (middle portion): The SRAS curve has a moderate slope, indicating that changes in price level have a moderate impact on output level. 3. Classical zone (upper portion): The SRAS curve is steeper, meaning that changes in price level have a significant impact on the output level.

Explain why the SRAS curve is flat in the Keynesian zone

The SRAS curve is relatively flat in the Keynesian zone because of the presence of spare capacity or underutilized resources in the economy. In this zone, the economy is operating below its full capacity, with high levels of unemployment and unused production capacity. Since there are idle resources, firms can increase their output without a significant increase in their costs. This means that even if the price level increases, firms can still produce more goods and services without substantially increasing their marginal cost. As a result, the SRAS curve is fairly flat in the Keynesian zone, reflecting the fact that changes in price level do not have a significant impact on the quantity of goods and services produced by firms.

How to identify if we are in the Keynesian zone of the AS curve

To determine if we are in the Keynesian zone of the AS curve, we need to look at specific macroeconomic indicators and signs. The following signs point toward an economy being in the Keynesian zone: 1. High levels of unemployment: A high unemployment rate indicates that the economy is operating below its full capacity, with plenty of idle labor resources available. 2. Output gap: An output gap exists when the economy is producing below its potential output level, meaning there are unused production resources and spare capacity. 3. Low inflation rate: A low inflation rate suggests that there is no significant upward pressure on prices as firms can produce more without increasing their costs. This could be a sign that the SRAS curve is flat and the economy is in the Keynesian zone. When these macroeconomic indicators and conditions are present, it is likely that the Short-run Aggregate Supply curve is in the Keynesian zone, and the economy has the potential for significant output growth without triggering high inflation.