As Keynesian underemployment is a normal situation due to the inflexibility of wages, the AS curve is horizontal in the SR (short run). Initially, the economy is at point E1, but due to the great depression, the AD curve shifts from AD1 to AD2, resulting in the new equilibrium at which point?
Price rigidity is a key assumption of the Keynesian paradigm in economics. Under this assumption, the prices of inputs and outputs are not flexible in the short run, yielding possible under-utilization of resources.
Answer and Explanation: 1
The equilibrium point is where the new aggregate demand curve intersects with the aggregate supply curve, which is point E2 show in the diagram...
See full answer below.
Become a member and unlock all Study Answers
Start today. Try it nowCreate an account
Ask a question
Our experts can answer your tough homework and study questions.Ask a question Ask a question
Learn more about this topic:
fromChapter 7 / Lesson 7
Learn the definitions of aggregate supply and aggregate demand. See the determinants of aggregate supply, the determinants of aggregate demand, and what causes them to shift.