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Macroeconomic Theory (A2)

Long run aggregate supply (LRAS): Keynesian economists disagree with this process of adjustment

  • 3 things to know
  • A2 Units 3 and 4

Overview

Recall questions on Keynesian economists disagree with this process of adjustment because of issues such as inflexible factor markets and that.

What you need to know

Answer each one before you reveal it.

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Key term

Give two factors that contribute to wage stickiness.

Key term

What happens to unemployment in the Keynesian model when wages fail to adjust downward?

Key term

What is the key difference between Neo-Classical and Keynesian views of the LRAS?

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    How does the Keynesian view describe the shape of the LRAS curve?

    Model answer

    The LRAS curve is not vertical throughout its range; it has a horizontal or upward-sloping section at output levels below full employment.

  2. 2

    What do Keynesian economists argue about the flexibility of factor markets?

    Model answer

    They argue that factor markets are inflexible, meaning wages and prices do not adjust quickly or fully to restore equilibrium.

  3. 3

    Define sticky wages.

    Model answer

    Sticky wages refer to the downward rigidity of nominal wages, where wages resist falling even when there is unemployment, due to factors such as contracts, minimum wages, trade unions, and worker resistance.

  4. 4

    Give two factors that contribute to wage stickiness.

    Model answer

    Any two from: employment contracts, minimum wage legislation, trade union power, or worker resistance to wage cuts.

  5. 5

    Why do Keynesian economists argue the economy may not automatically return to full employment?

    Model answer

    Because sticky wages and inflexible factor markets prevent the necessary adjustments, allowing the economy to remain in a state of persistent unemployment.

  6. 6

    What happens to unemployment in the Keynesian model when wages fail to adjust downward?

    Model answer

    Unemployment can persist because the economy does not automatically adjust to full employment equilibrium.

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